26 - “The Interdependence of Investment Decisions” Revisited

Abstract

This chapter reviews an analysis made by Chenery that he illustrated in an article, The Interdependence of Investment Decisions. He demonstrated that interdependence combined with the economies of scale in production makes explicit nonmarket coordination necessary to achieve the optimal allocative decisions. The chapter presents the extension of the Chenery analysis by developing a rigorous quantitative criterion that determines whether interdependence matters for the decision to produce a product. The model used for this analysis encapsulates what is at the core of the mixed integer programming models that have recently found increasing practical application to industrial investment analysis. The model pertains to production and investment decisions for a group of interdependent activities that would typically encompass only a few related sectors of an economy. Thus, the model presumes a division of economy wide activity into endogenous and exogenous activities. There is much scope for interdependence among production activities in the model's specification.