We report laboratory experiments investigating the cyclicality of investment. In our setting, optimal investment is counter-cyclical because investment costs fall following market downturns. However, we do not observe counter-cyclical investment. Instead, heuristic investment models where firms invest a fixed percentage of their liquidity, or a fixed percentage of anticipated market demand, better fit our data on average 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.
Rodet, C. S., & Smyth, A. (2018). Experimental evidence on the cyclicality of investment. ESI Working Paper 18-02. Retrieved from https://digitalcommons.chapman.edu/esi_working_papers/237