Tobin's marginal ‘q’ and tests of the firm's dynamic equilibrium

In this paper we derive and estimate a structural model where investment is driven by Tobin's marginal q. Following the dynamic factor demand literature, the investment equation is embedded in a system where demand equations for variable inputs are also specified and estimated. The hypothesis that the firm is in dynamic equilibrium, i.e. that the capital stock evolves along an optimal path defined by a marginal q rule, is tested against a general alternative hypothesis that such a path is either non-optimal or it is described by an optimal rule other than q. We find that both dynamic and long-run equilibrium specifications are rejected. Hence it is necessary to revise the specification of empirical q equations, for them to be still considered truly structural models.