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Faculty Research Working Paper Series
F.M. Scherer
Professor of Public Policy and Corporate Management in the Aetna Chair, Emeritus
phone: 617-497-4345
Two Paradoxes in the Theory of Capital Investment and Competition
Scherer, F.M. "Two Paradoxes in the Theory of Capital Investment and Competition." HKS Faculty Research Working Paper Series RWP13-030, September 2013.
Abstract
This paper considers two paradoxes concerning the relationship between capital investment decisions and competition. First, conventional capital budgeting methods imply that substantial infra-marginal surpluses are attained above the cost of capital, but this is inconsistent with the premise that returns on capital equal the cost of capital in competitive markets. Second, contrasts in the pharmaceutical industry between high reported returns on capital invested, the accounting treatment of research and development outlays, and inter-firm competition in research and development are explored.
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