Financing constraints, irreversibility and investment dynamics

Andrea Caggese

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We develop a model of an industry with many heterogeneous firms that face both financing constraints and irreversibility constraints. The financing constraint implies that firms cannot borrow unless the debt is secured by collateral; the irreversibility constraint that they can only sell their fixed capital by selling their business. We use this model to examine the cyclical behavior of aggregate fixed investment, variable capital investment, and output in the presence of persistent idiosyncratic and aggregate shocks. Our model yields three main results. First, the effect of the irreversibility constraint on fixed capital investment is reinforced by the financing constraint. Second, the effect of the financing constraint on variable capital investment is reinforced by the irreversibility constraint. Finally, the interaction between the two constraints is key for explaining why input inventories and material deliveries of US manufacturing firms are so volatile and procyclical, and also why they are highly asymmetrical over the business cycle.

Keywords: Financing Constraints; Irreversibility; Investment (search for similar items in EconPapers)
JEL-codes: D21 E22 E32 G31 (search for similar items in EconPapers)
Date: 2001-06, Revised 2006-08
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Financing Constraints, Irreversibility, and Investment Dynamics (2015)
Journal Article: Financing constraints, irreversibility, and investment dynamics (2007)
Working Paper: Financing constraints, irreversibility, and investment dynamics (2003)
Working Paper: Financing Constraints, Irreversibility, and Investment Dynamics (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1008

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