Growth and finance: An intertemporal model

Frequently, intertemporal models, for example, Uzawa's (1969) work on growth, are based on the separation of investment and the financing decisions of firms. Finance variables are disregarded. In contrast, along the lines of the theory of imperfect capital markets, the present paper allows for cross-effects between firms' financial structure and the value of firms. A steady-state analysis gives empirical predictions on the relation of investment, finance and debt, and Hopf-Bifurcation analysis establishes the possibility of cyclical paths.     

Optimal taxation and discount rate for public investment in a growth setting

This paper studies the optimal policy of a government which maximizes intertemporal social welfare using such instruments as taxes on interest income and wages, and debt in conjunction with public investment. In doing so, it has to face a decentralized economy where in each generation individuals and firms are free to maximize their own objectives subject to their own private constraints. The welfare function is a sum of discounted generational utilities and its maximization is handled by using dynamic programming. From the first order conditions so derived, it appears that an optimal policy of taxation and public capital accumulation is that which sets the tax rates according to Ramsey's optimal taxation structure and which equates the rate of return on public investment to the rate of social time preference.     

Capital accumulation games of infinite duration

Consider a market in which firms accumulate capital according to the Nerlove-Arrow capital accumulation equation. Each player chooses a path of investment and thus an induced path of capital to maximize his total discounted profits which depend on his own capital and the capital stocks of his rivals. Existence is proved for such a nonzero sum, infinite horizon differential game and conditions under which the game converges to a particular stationary point, regardless of the initial conditions are shown. Thus, the game possesses the property of conditional global asymptotic stability.     

Heterogeneous Households,the Distribution of Wealth,and the Laursen-Metzler Effect*

To study the effects of a terms-of-trade deterioration the paper constructs a dynamic model with heterogeneous households that maximize intertemporal utility. It shows that insofar as this shock leads to a redistribution of wealth-an outcome ignored by the literature because of the representative-agent assumption invariably adopted-it may give rise to an initial current-account deficit and nonmonotonic adjustment paths. the paper also buttresses the argument that heterogeneous-household models help explain the observed “excess smoothness” of consumption.     

Intertemporal Emission Permits Trading Under Uncertainty and Irreversibility

This paper analyzes the effect of emission permit banking on clean technology investment and abatement under conditions where the stringency of the future cap is uncertain. We examine the problem of heterogeneous firms minimizing the cost of intertemporal emission control in the presence of stochastic future pollution standards and emission permits that are tradable across firms and through time. A firm can invest in clean capital (an improved pollution abatement technology) to reduce its abatement cost. We consider two possibilities: that investment is reversible or irreversible. Uncertainty is captured within a two period model: only the current period cap is known. We show that if banking is positive and marginal abatement costs are sufficiently convex, there will be more abatement and investment in clean technology under uncertainty than there would be under certainty and no banking. These results are at odds with the common belief that uncertainty on future environmental policy is a barrier to investment in clean capital. Moreover, under uncertainty and irreversibility, we find that there are cases where banking enables firms to invest more in clean capital.     

THE GLOBALIZATION OF INVESTMENT

This paper questions the commonplace assumption that the accumulation of capital has become a global phenomenon. Evidence suggests that, far from transcending the boundaries of the nation state, productive investment remains an essentially national phenomenon. The great bulk of investment is domestic investment undertaken by domestic firms. Little evidence exists to support the claim that investment decisions are sensitive to international profit rate differentials. Furthermore, strong evidence suggests that the nationality of a multinational corporation significantly influences its likely pattern of foreign investment. Data indicate that sweeping assertions about the globalization of capital provide a poor basis for understanding both the process of capital accumulation and its implications for workers, communities, and policymakers.     

Taxing the Financially Integrated Multinational Firm

This paper develops a theoretical model of corporate taxation in the presence of financially integrated multinational firms. Under the assumption that multinational firms use some measure of internal loans to finance foreign investment, we find that the optimal corporate tax rate is positive from the perspective of a small, open economy. This finding contrasts the standard result that the optimal‐source‐based capital tax is zero. Intuitively, when multinational firms finance investment in one country with loans from affiliates in another country, the burden of the corporate taxes levied in the latter country partly falls on investment and thus workers in the former country. This tax exporting mechanism introduces a scope for corporate taxes, which is not present in standard models of international taxation. Accounting for the internal capital markets of multinational firms thus helps resolve the tension between standard theory predicting zero capital taxes and the casual observation that countries tend to employ corporate taxes at fairly high rates.     

The timing Of Exchange Regime Collapse Under Capital Controls

This paper investigation the Nature of balance-of payments crises in regimes with capital controls. It extends earlier works on Capital controls by assuming that households manage their consumption and asset portfolios to maximize intertemporal utility. Our main result is that capital controls are effectives in delaying, but not preventing, a breakdown of a fixed exchange rate regime in the presence of money- financed deficits. [F31]     

Investment options and the business cycle

This paper extends [R. Mehra, E.C. Prescott, Recursive competitive equilibrium: The case of homogeneous households, Econometrica 48 (1980) 1365-1380] to a production economy with two capital goods. It is an RBC model in which each unit of investment requires a new idea, an ‘option.’ When options are scarce, new capital is harder to put in place and the value of old capital rises. Thus the stock market and Tobin's Q are negative indexes of intangibles. During a boom, Q rises gradually, as options are used up. Because investment represents an exercise of options, it has an intertemporal substitution tradeoff that is absent from the adjustment-cost model. Equilibrium may be efficient even without markets for knowledge; the stock market may suffice.     

风险冲击对农户经济决策的影响与正规小额信贷的作用

本文基于行为与实验经济学理论与方法，通过对吉林省3 445个农户开展的实地实验，使用双重差分评估了风险冲击对农户经济偏好与决策的因果效应。研究发现，风险冲击会使农户更加厌恶风险，回避高风险—高回报的生产投资策略，并加大农户对跨期时间偏好不一致的程度，从而降低农户的跨期决策效率。传统的新古典微观经济学对理性人拥有稳定偏好的假设至少在冲击后短期内并不成立。正规小额信贷可得性能够调节风险冲击，表现在：缓解个体尤其是男性、中老年或低教育水平人口在风险冲击下的焦虑、压力和负面情绪，从而促进农户面对风险冲击时的风险承担行为；降低女性的风险厌恶概率；缓解农户跨期时间贴现偏好不一致的程度；缓解中老年或资产贫困人口的损失厌恶程度。     

A Nested logit approach to modelling the location of foreign direct investment in the Central and Eastern European Countries

This paper applies the Nested logit model to a three-level dataset in order to examine the factors explaining foreign investment location decisions into 13 Central and Eastern European Countries (CEECs) over an eleven-year period between 1997 and 2007. The three-level dataset allows firm, industry and country factors to simultaneously determine the firm-level investment location decisions. The Nested logit model partially relaxes the assumption of the independence from irrelevant alternatives and tests if national boundaries affect the choice of investment location of multinational enterprises in the CEECs. In addition, the Heteroskedastic Extreme Value model is used to help identify an appropriate nesting structure. Empirical results show that the responsiveness of the firms' decision regarding where to locate capital in the CEECs to country-level variables differs both across sectors and across firms of different sizes and profitability.     

The impact of the 2008 German corporate tax reform: A dynamic CGE analysis

In this paper we develop the dynamic CGE model, ifoMod, which is designed to analyse the impact of fundamental tax reforms and in particular capital income tax reforms for Germany. The model is in line with neoclassical growth theory and features all important behavioural interactions between the four major building blocks of an economy including the firm and household sector, the government and the rest of the world. We consider firms of different legal forms which all face an intertemporal investment problem, a financing problem w.r.t. the optimal choice of debt and equity financing as well as a factor input problem when deciding on the optimal amount of different skill types of labour employed. We show the impact of different types of taxes on the behavioural margins of firms and households. The conducted simulation shows the impact of the latest German corporate tax reform of 2008 on the German macroeconomic variables such as investments, GDP, consumption and household's welfare.     

Optimal reinsurance and dividend for a diffusion model with capital injection: Variance premium principle

This paper considers the optimal dividend problem with proportional reinsurance and capital injection for a large insurance portfolio. In particular, the reinsurance premium is assumed to be calculated via the variance principle instead of the expected value principle. Our objective is to maximize the expectation of the discounted dividend payments minus the discounted costs of capital injection. This optimization problem is studied in four cases depending on whether capital injection is allowed and whether there exist restrictions on dividend policies. In all cases, closed-form expressions for the value function and optimal dividend and reinsurance policies are obtained. From the results, we see that the optimal dividend distribution policy is of threshold type with a constant barrier, and that the optimal ceded proportion of risk exponentially decreases with the initial surplus and remains constant when the initial surplus exceeds the dividend barrier. Furthermore, we show that the optimization problem without capital injection is the limiting case of the one with capital injection when the proportional transaction cost goes to infinity.     

The Influence of Financial Factors on Corporate Investment

Abstract
Recent theoretical developments have shown that cash flows and the structure of a firm's balance sheet may have an important influence on investment. Establishing a link between cash flows, leverage and investment provides insights into the way that monetary policy and cyclical factors more generally influence the corporate sector. If cash flows are an important determinant of investment then changes in monetary policy (by changing interest rates) will influence investment through a cash flow effect as well as through altering the rate at which the returns to investment are discounted. If this is the case, the higher leverage of the corporate sector implies, other things being equal, that monetary policy may have a larger impact on investment than in the past .
In this article we use panel-data analysis to examine the impact of financial factors on investment decisions of firms in the Australian corporate sector. We find strong support for the influence of financial factors on investment decisions. Leverage, internally generated cash flows, and the stock of cash and liquid financial assets are all important influences on investment behaviour, particularly for smaller firms, highly leveraged firms, and firms with high retention ratios .     

The effect of political regimes and technology on economic growth

This study analyses the role of financial constraints on the investment decisions of 497 Brazilian firms. We use panel data, with firm-specific information for different years, allowing for the abandonment of the representative firm model. Information on capital intensity at the firm level is used to group firms. We estimate different models and the results suggest the presence of financial restrictions, especially for capital-intensive firms.     

The impact of convertible debt financing on investment timing

We develop a model to examine the timing of investment decisions in relation to the issuance of convertible debt by firms. Our model shows that when the demand shock has higher volatility, the firm finances the investment cost with high-coupon convertible debt. We find that default occurs earlier for firms that finance with convertible debt rather than with straight debt. We also find that firms with high-growth prospection, high volatility, and low capital costs that issue convertible debt tend to defer investments. Furthermore, we examine the investment decisions in which the convertible debt includes a call provision. We show that firms that use callable convertible debt invest earlier than those that use non-callable convertible debt by using suboptimal coupon payments. The opportunity from the forced conversion increases as the volatility increases. These results are consistent with recent empirical evidence.     

Business Formation and Aggregate Investment

The paper proposes an intertemporal equilibrium model of vintage capital and monopolistic competition. Reflecting a tradeoff between the number and capacity of new machines, investment may be extensive or intensive. External gains from specialization and rationalization result in distorted investment decisions. The paper compares the effectiveness of a general investment tax credit with a start-up subsidy that shifts the direction of investment towards a more extensive form. An optimal policy of investment promotion is derived.     

Risk and intertemporal substitution: Livestock portfolios and off-take among Kenyan pastoralists

Most decisions involve variability in two dimensions: uncertainty across states of nature and fluctuations over time. The stakes involved in tradeoffs between these variability dimensions are especially high for the poor who have difficulty managing and recovering from shocks. We assume Epstein and Zin recursive preferences and estimate risk aversion and intertemporal substitution as distinct preferences using data from Kenyan herders. Results suggest that the assumption implicit in additive expected utility models that relative risk aversion (RRA) is the inverse of the elasticity of intertemporal substitution (EIS) is flawed. Specifically, our RRA and EIS estimates are consistent with a preference for the early resolution of uncertainty, which we believe is driven importantly by the instrumental value of early uncertainty resolution. This same preference pattern is consistent with asset smoothing in response to a dynamic asset threshold.     

THE ALLOCATION OF OECD DIRECT INVESTMENT BETWEEN CEECS: A DISCRETE CHOICE APPROACH

The choice of the location of foreign direct investment is a complex phenomenon, depending not only on host‐country characteristics, but also on host‐industry and specific source‐firm characteristics. To capture these different influences for foreign investment location decisions into 13 Central and Eastern European Countries (CEECs) over a twelve‐year period, this paper uses a Generalized Nested Logit (GNL) model with firm, industry, and country data. The novel empirical results show that the responsiveness of firms’ decisions regarding where to locate capital in CEECs to country‐level variables differs both across sectors and across firms of different sizes and profitability.     

Dynamic Effects of Tariff Liberalization: an Intertemporal Cge Approach*

The paper presents a multisectoral CGE model with overlapping generations in which intertemporal optimization by households and firms determines savings and investment under perfect foresight. We calibrate the model to Austrian data and simulate a unilateral tariff liberalization scenario. We find that unilateral tariff reductions are expansionary in the long-run but involve considerable diversity in sectoral adjustment. Foreign debt increases in the long-run, causing an improvement in the trade balance. In terms of welfare, some old generations gain at the expense of young and future generations. Budgetary policies are shown to be crucial for several effects.