Endogenous growth with a limited fossil fuel extraction capacity

Campbell (1980) and following authors have discussed a limited resource extraction capacity as an augmentation of the well‐known Hotelling model. We integrate a limited extraction capacity and related investments in the endogenous growth model of Tsur and Zemel (2005) to study its effect on economic development. The capacity constraint gives rise to three effects. On the one hand, higher energy costs and the reallocation of production towards capacity investments decrease production available for consumption, research and/or capital investments (energy costs and reallocation effect). On the other hand, research investments may increase, which boosts available production (research effect). Depending on the capital endowment and the strength of the effects, long‐run consumption may be boosted or depressed. In particular, the capacity constraint may render everlasting consumption growth non‐optimal in a resource‐rich economy. Furthermore, we find that capacity investments may be postponed to later points in time if the capital endowment is high.     

When do Heuristics Matter in Global Capital Markets? The Case of the BRIC Acronym

ABSTRACT

Several recent publications have argued that the use of heuristics by financial investors can distort global capital flows, but scholars have paid little attention to the scope conditions that determine when heuristics become influential (and when they don’t). Building on work in economic sociology and behavioural finance we suggest that the degree to which investment heuristics can bias aggregate capital flows depends on the levels of uncertainty and self-referentiality that structure the environments under which investment decisions are being made. Applying these insights to the two principal global markets for corporate investment, we argue that the institutional structure of markets for short-term portfolio equity investments (PEI) is far more conducive to trigger the mimetic adoption of a specific heuristic than in markets for long-term foreign direct investments (FDI). To test this hypothesis, we leverage the high level of arbitrariness of the selection of Brazil, Russia, India and China into the BRIC acronym and empirically examine the impact of its remarkable rise to prominence among communities of financial investors in the mid-2000s on global capital flows to emerging economies. In line with the theoretical argument, we find robust evidence of a strong BRIC-bias in markets for PEI but not FDI.     

Capital Trading,Stock Trading,and the Inflation Tax on Equity

A market for used capital goods, or financial instruments that represent the ownership of the used capital goods, induces inflation taxes on wealth and on the nominal income flows that they provide. This paper explicitly introduces trading in either used capital goods or financial instruments into the standard stochastic growth model with money and production. These two monetary economies are equivalent. The value of the firm is equal to the firm's capital stock divided by inflation. The resulting asset-pricing conditions indicate that the effect of inflation on asset returns differs from the effects found in the literature by the addition of a significant wealth tax. Journal of Economic Literature Classification Numbers: E0, E4, E5.     

R&D investments and corporate cash holdings

This paper presents evidence about how research and development (R&D) expenditures affect corporate cash holdings in European country groups that differ in their innovation capacity. In theory, one can expect intangible investments such as R&D to result in higher cash stocks than fixed investments, particularly because intangible capital is less suitable as collateral for obtaining external funds. The relationship can be expected to be particularly strong in innovative countries. These countries carry out a relatively high proportion of cutting-edge R&D, which tends to be particularly risky and may be associated with substantial gestation lags before becoming productive. These features tend to increase firms' precautionary cash holdings. To investigate this issue in a European context, we examine different groups of countries that are clustered based on differences in their innovative capacity. Our estimation results confirm a positive relation between changes in R&D investment and changes in cash holdings, whereas changes in fixed investment do not appear to be related to changes in cash positions. The impact of changes in R&D on cash tends to be higher for country groups characterized by a high level of innovative capacity than for countries with moderate levels of innovative capacity. However, the differences across country groups are less pronounced than expected.     

资产专用性、淘汰落后产能政策与上市公司资本投资

基于投资支出——投资机会模型,分别考察资产专用性、淘汰落后产能政策及其交互作用,对工业企业上市公司资本投资的影响。研究结果表明：拥有越高资产专用性的企业,其资本投资越大;淘汰落后产能政策加速了政策所属行业企业的投资;但对于拥有较高资产专用性的淘汰落后产能政策所属行业企业,淘汰落后产能政策抑制了其资本投资,这种情况在公司所在地地方政府环境政策支持度较高的地区尤其明显,而在地方政府环境政策支持度较低的地区则不显著。     

A new ICEEMDAN-based transfer entropy quantifying information flow between real estate and policy uncertainty

We quantify the dependence between real estate indices and global economic policy uncertainty for 12 top-advanced countries. Generally, real estate investments are found to be highly risky to information flow from global economic policy uncertainty. amidst policy uncertainty, we find diversification, safe haven, and hedging prospects – based on the market conditions – at short term frequencies only, for the pairs between (a) Japan and the US; (b) Singapore and the US; (c) China and Canada; (d) China and Hong Kong. Our findings underscore market efficiency (inefficiency) at mid-and long-term (short-term) frequencies. In the presence of policy uncertainty, our findings underscore the operability of ingrained market dynamics between real estate investments in the mid-and long-term horizons. It is prudent for investors to combine real estate investments with other asset classes that are less risky to (or are positive recipients of) information flow from global EPU to hedge against adverse market shocks from any asset in the portfolio based on market conditions. Practically, not only should legislations be flexible to the changing market trends in the short term, but they should also be strategically crafted to retain the fundamental market dynamics between real estate investments in the mid-and long-term economic horizons.     

A portfolio approach to climate investments: CAPM and endogenous risk

Is there a role for investments in climate change mitigation despite low expected return? We use a model of intertemporal expected utility maximisation to analyse this question. Similar to the capital asset pricing model (CAPM) the rate of return depends on the correlation of risk between the return on investments in climate change mitigation and the market portfolio, but in contrast to the classical CAPM we admit the fact that economic and environmental systems are jointly determined, implying that environmental risk is endogenous. Therefore, investments in climate change mitigation may reduce risk via self-protection and self-insurance. If risk reduction is accounted for in cost–benefit evaluations, climate investments may be justified despite low expected return. These aspects of climate investments are not, however, communicated via standard cost–benefit analyses of climate policy. Optimal climate policy may therefore be more ambitious than previously considered.     

Options in technology investment games: The real world TFT-LCD industry case

The Thin Film Transistor-Liquid Crystal Display (TFT-LCD) industry has demonstrated that the investment of huge amounts of capital in new plants is a key factor for success. Decisions about investing in the latest generation of plant involve billions of dollars and a great deal of uncertainty. Moreover, the industry shows distinct oligopolistic characteristics, so the first mover's reactions must be considered when making capital decisions in such competitive environments. The traditional net present value (NPV) rule is a ‘now-or-never’ concept that fails to capture the need for managerial flexibility, which is especially important when investments are irreversible and involve a great deal of uncertainty. In this paper, we use a combination of real options and game theory to analyze the investment strategies of a case company in the TFT-LCD industry. The results show that real options reveal the value of flexibility, which NPV fails to consider. In addition, we apply game theory analysis to different investment strategies to demonstrate the decision-making processes used by competing companies.     

Anticipation effects of technological progress on capital accumulation: a vintage capital approach

Due to embodied technological progress new generations of capital goods are more productive. Therefore, in order to study the effects of technological progress, a model must be analyzed in which different generations of capital goods can be distinguished. We determine in what way the firm adjusts current investments to predictions of technological progress. In the presence of market power we show that a negative anticipation effect occurs, i.e. current investments in recent generations of capital goods decline when faster technological progress will take place in the future, because then it becomes more attractive to wait for new generations of capital goods. In case that only investments in new machines are possible, actually a whole wave of anticipation phases arises.     

The adequacy of volatility for the elaboration of technology valuation based on real options

When evaluating the economic value of a technology or business project, we need to consider the period and cost for commercialisation. Since the discounted cash flow (DCF) method has limitations in that it can not consider consecutive investments or does not reflect the probabilistic property of commercialisation cost, we often take it desirable to apply the concept of real options with key metrics of underlying asset value, commercialisation cost, and volatility, while regarding the value of technology and investment as the opportunity value. We provide more elaborated real options model, which reflects the uncertainty in the option pricing model (OPM).     

Economic policy uncertainty and firm investment: evidence from the U.S. market

This paper examines the impact of economic policy uncertainty on firm-level capital investment, by not only delving into the long-term investment-uncertainty relation like previous studies, but also analyzing the short-term investment-uncertainty relation for the U.S. market. The empirical investigations show that firms decrease short-term, long-term, and total firm investments when encountering higher economic policy uncertainties. The research also explores the non-linear investment-uncertainty relation based on various theories. Our findings present a U-shaped relationship between short-term, long-term, and total investments and uncertainties. Policy implications are provided from our empirical results.     

The new investment theory and aggregate dynamics

This paper develops a dynamic general-equilibrium model of capital adjustments under monopolistic competition. Investments are partially irreversible. The model includes microfoundations for consumption decisions and capital-adjustment strategies. The effects of the model parameters on the optimal capital-adjustment strategy are determined analytically. A major result is that the aggregate net investment is proportional to the difference between the desired and previous aggregate capital. The speed of adjustment decreases with the cost of reversibility, is invariant to the shares of labor and capital, and increases with the level of macroeconomic uncertainty. However, the latter effect is not quantitatively important.     

Government incentive strategies and private capital participation in China’s Shale gas development

Shale gas development investments are uncertain and irreversible in the initial stage in China. Flexible incentive strategy is needed for governments to guide private capital participation at different development stages. This study aims to provide analysis governments can use to encourage private investment in shale gas projects according to its plans in an extended real options framework. A social benefits variable is introduced to determine the threshold of social benefits that determine whether the government will choose a deferred or instant incentives strategy. By considering the efficiency factor, we show the optimal arrangements of two kinds of incentives: tax cuts and production subsidies, to implement incentive targets. The results indicate that current market demand and social benefits are the key factors that affect the government’s choice of incentive strategy. We also find that the optimal level of incentives, either tax cuts or production subsidies, are independent of current market demand and future market uncertainty under the delayed incentive strategy, but which affect the optimal level of incentives under the instant motivation strategy, and ignoring the negative influence of unpredictable random events on future market demand might lead to insufficient government incentives in this case.     

The international business cycle as intertemporal coordination failure

Where investments are irreversible and the future is uncertain, people in two countries can make investment decisions that turn out to be mutually inconsistent. I argue that this intertemporal coordination failure explains international business cycles in a two-currency-area setting with a floating foreign exchange rate. The sequence of events starts with an expansionary domestic monetary shock, which decreases the domestic real interest rate. Facing low transactions costs, people spend the new money relatively early in the foreign exchange market and in the foreign market for loanable funds. Domestic monetary expansion thereby changes the relative prices of domestic and foreign goods and also of goods of earlier and later stages of production. The relative price changes lead to intertemporal and international coordination failures once the monetary expansion ends and relative prices change. Domestic monetary policy thereby causes the comovement across different currency areas we observe of business cycles.     

1985—2010年间中国制造业要素 配置扭曲变动的解析 ——资本结构变动与技术进步的影响分析

本文对1985—2010年间中国制造业部门的要素配置扭曲系数的变动进行了解析。要素配置扭曲系数的变动一方面是由于不同行业间投资结构失衡所引致，但是另一方面则反映了不同行业间不同类型技术进步差异对要素报酬率变动的影响效应。笔者发现：（1）近十多年来，部分重化工业的资本快速扩张引起行业间投资结构失衡，并加大了行业间的要素配置扭曲程度；（2）相对于1985—2000年间，技术进步因素在2001—2010年间对要素配置扭曲系数的变动的影响效应越来越大。本文建议政府在制定产业政策时，限制一般生产性的资本投资鼓励政策，而更多转向鼓励创新和研发投资的政策，鼓励体现有技术进步因素的资本要素与劳动要素之间的相互替代。     

Technology adoption and accumulation in a vintage-capital model

We present a model of capital accumulation and technology adoption in a vintage-capital framework. The model is an infinite-horizon/infinite-dimensional optimal control model: the firm employs a continuum of technologies (a continuum of heterogeneous capital goods). Capital goods are technology specific, their technology is related to vintage and technology progress. The entrepreneur maximizes the profits obtained by employing a continuum of technologies under the assumption of constant returns to scale and bearing adjustment costs for gross investments. The diffusion of a new technology is established by allowing the entrepreneur to invest in vintage capital goods.     

Welfare Effects of Different Public Expenditures and Taxes in the Netherlands

This paper explores the welfare effects of public consumption, income transfers and public investment financed through different types of taxes. One surprising result is that, contrary to public consumption goods, public capital goods do not necessarily become less attractive if distortionary taxes, rather than lump-sum taxes, are necessary to finance them. The numerical simulations reveal that the net welfare effects of public investments in the Netherlands are typically positive if financed through lump-sum taxes or distortionary taxes on labor. However, if a source-based capital tax is adopted to finance public investments, the overall welfare effect may be negative.     

How China is Reorganizing the World Economy*

We analyze the impact of China's integration into the global economy on other countries, Asian countries in particular. We first examine how the growth of China's exports is affecting the exports of other countries in Asia and the rest of the world. Our innovation is to distinguish exports of capital goods, consumer goods, and intermediates and to disaggregate textiles and consumer electronics, the most visible sectors where China's presence is felt. We next look to the impact of China on direct foreign investment flows. Here our innovation is to distinguish vertical and horizontal foreign direct investment (FDI) and to consider how they are affected by supply‐chain relationships. We then look more closely at factors influencing the articulation of these supply chains, the fragmentation of production, and the emerging international division of labor, focusing on two industries, electronics and autos, that exhibit very different responses. The results suggest that countries specializing in the production and export of components and raw materials feel positive effects from China's growth, while countries specializing in the production of consumer goods feel negative effects. Similarly, countries that compete with China for horizontal FDI find it more difficult to attract foreign investment as a result of that country's emergence, while countries that are potentially attractive destinations for vertical FDI find it easier to attract foreign investment as a result of trade links, especially in components and intermediates, that allow them to take advantage of supply chains involving their large and dynamically growing neighbor.