Agency Costs and Investment Behavior

Viktor Dorofeenko, Gabriel Lee and Kevin Salyer ()
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Viktor Dorofeenko: Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria

No 182, Economics Series from Institute for Advanced Studies

Abstract: How do differences in the credit channel affect investment behavior in the U.S. and the Euro area? To analyze this question, we calibrate an agency cost model of business cycles. We focus on two key components of the lending channel, the default premium associated with bank loans and bankruptcy rates, to identify the differences in the U.S. and European financial sectors. Our results indicate that the differences in financial structures affect quantitatively the cyclical behavior in the two areas: the magnitude of the credit channel effects is amplified by the differences in the financial structures. We further demonstrate that the effects of minor differences in the credit market translate into large, persistent and asymmetric fluctuations in price of capital, bankruptcy rate and risk premium. The effects imply that the Euro Area's supply elasticities for capital are less elastic than the U.S.

Keywords: Agency costs; Credit channel; Investment behavior; E.U. Area (search for similar items in EconPapers)
JEL-codes: E2 E4 E5 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2005-12
New Economics Papers: this item is included in nep-dge, nep-eec, nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://irihs.ihs.ac.at/id/eprint/1674 First version, 2005 (application/pdf)

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