ABSTRACT
This chapter takes up some of the hypotheses that have been put forward to explain plant and equipment purchases, the empirical support for these hypotheses, and empirical evidence on the returns on investment. When John Maynard Keynes developed macroeconomic theory to explain why unemployment could exist in an equilibrium, one of his conditions for that equilibrium was that planned aggregate investment must equal planned aggregate savings. One of the first theories of investment to come out of the macroeconomic revolution launched by Keynes's General Theory was the accelerator theory. It is extremely simple in its micro-foundations, and focuses only on the marginal returns side of the investment scissors. All cash flow models of investment assume that the firm's cost of capital rises for some reason when it has to resort to outside sources of finance. In the extreme we might assume that the firm can raise no outside capital.
