|Title:||On the interaction of non-convex investment technologies and financial frictions|
|Abstract:||This thesis analyses the interaction of financial frictions with fixed adjustment costs ofreal capital and other non-convexities in the investment technology. The key result isthat the combination of fixed adjustment cost and financial market imperfectionsaggravate the influence of each factor on investment decisions.The analysis starts off with a model of a monopolistically competitive firm facing bothfrictions. In this model, the interaction of the frictions opens a further channel ofinfluence for financial frictions on investment besides the one most models haveemphasised so far, the effect financial frictions have on the cost-of-capital. The furtherchannel is a separate effect of liquidity on the frequency with which investment projectsare undertaken.This theoretical framework is then empirically assessed by employing two balancesheet data sets, a British (Cambridge DTI-Database) and a German one (BonnDatabase). While the long-run effect of liquidity on the optimal stock-of-capital is at besta very weak one, the frequency-effect appears both statistically and economicallyimportant and explains virtually all correlation of investment and liquidity.The long-run optimal stock of capital is estimated using panel co-integrationtechniques. The investment-function itself is obtained by non-parametrically regressinginvestment on the difference between optimal and actual capital (the co-integrationerror term) and the equity ratio.The non-parametric approach is chosen as the investment-function in its functionalform depends itself on the form of the production function as well as on the forms of thedistribution-functions of all shocks that influence firm-level investment in a complexmanner, so that specifying a precise functional form would be very restrictive and mightbias the results. Yet, estimating the investment-function non-parametrically avoids thispossible mis-specification bias. By estimating average derivatives, still the variousalternative investment models can be tested structurally and the introduced frequencyeffect can be identified.The last part of the thesis extends the introductory model and develops a model inwhich irreversibility of investment, capital market imperfections and imperfect goodsmarketcompetition interact and so bring about patterns of investment behaviour thatare neither present in the irreversible investment, nor in the imperfect competitionframework. Especially, the model gives a rational explanation for the occurrence ofpredatory behaviour in non-collusive industries.|
non-convex adjustment costs
|Appears in Collections:||Lehrstuhl Volkswirtschaftslehre (Mikroökonomie)|
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