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Competitive blind spots and the cyclicality of investment: Experimental evidence
Author(s) -
Rodet Cortney S.,
Smyth Andrew
Publication year - 2020
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/soej.12446
Subject(s) - economics , investment (military) , profit (economics) , market liquidity , monetary economics , fixed investment , return on investment , microeconomics , capital formation , politics , financial capital , political science , law
We report laboratory experiments investigating the cyclicality of profit‐enhancing investment in a competitive environment. In our setting, optimal investment is counter‐cyclical when investment costs fall following market downturns. However, we do not observe counter‐cyclical investment. Instead, we see much less strategic behavior than our rational investment model anticipates. Our participants exhibit what Porter (1980) terms a competitive blind spot , and heuristic investment models where individuals invest a fixed percentage of their liquidity, or a fixed percentage of anticipated market demand, better fit our data than does optimal investment. We also report a control treatment without cost changes and a treatment with asymmetric investment liquidity. Both of these extensions support our main result.