How Do Future Constraints Affect Current Investment?

Enrico Saltari and Giuseppe Travaglini

The B.E. Journal of Macroeconomics, 2003, vol. 3, issue 1, 21

Abstract: In this paper we build up a theoretical continuous time model to study how future constraints affect current investment decisions. We show that firms constrained in the future, but currently unconstrained, select an optimizing investment trajectory different from that of an identical firm that will never be constrained. We provide a complete characterization of the formal solution to the constrained problem: in particular, we show that two simple conditions allow us to compute the trajectory for the (potentially) constrained firm. A basic result of our analysis is that the effect of future financing constraints are captured by the current q value of the firm.

Keywords: Constraints; Firm behavior dynamics; Euler equation (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (10)

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DOI: 10.2202/1534-5998.1101

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