The intertemporal behavior of economic profits

Abstract

The intertemporal behavior of economic profits is examined. Tests show that profit rates are not independent of their initial level. A set of tests for the nature of the profit adjustment mechanism is proposed and a stock market-based profit measure is employed. Despite intertemporal dependence, we find evidence of profit rate adjustment patterns roughly consistent with neoclassical theory for negative profits. In some, but not all cases, the probability of maintaining positive profits appears less than the probability of moving toward zero profits.