Investment Theory and Models

Keynesian Perspective

He believed in the "animal spirits" of public expectations. Firm investment is modeled by:
\(I = I(mec, Y_{-1})\)
where investment is a function of the marginal efficiency of capital (internal rate of return, IRR), and the previous period's output available. 

Neoclassical Approach (Hall and Jorgensen)

"Our basic conclusion is that tax policy is highly effective in changing the level and timing of investment expenditures. In addition we find that tax policy has had important effects on the composition of investment."