Journal of Applied Mathematics and Decision Sciences
Volume 2005 (2005), Issue 4, Pages 201-211

Profitability, investment, and efficiency wages

João Ricardo Faria

Department of Economics and Finance, University of Texas Pan American, 1201 West University Drive Edinburg, 78541, TX, USA

Received 13 October 2004

Copyright © 2005 João Ricardo Faria. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


We examine a model that blends the neoclassical theory of investment with an intertemporal efficiency wage model with turnover costs. Investment decisions in capital are associated with the allocation of labor and the determination of efficiency wages. The model relates Tobin's q to efficiency wages and, in particular, to the Solow condition. It provides a general framework to analyze firm's intertemporal choices of capital, labor and efficiency wages.