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Investment, Underinvestment and Imperfect Capital Markets

Elie Appelbaum and Richard Harris

Working Paper from Economics Department, Queen's University

Abstract: This paper characterizes precisely the optimal capital policy for a firm facing a non-price rationing constraint in the market for investment funds. With this particular capital market imperfection firms may generally 'overinvest' relative to a perfect market case, rather than underinvest as conventional wisdom suggests. Underinvestment occurs, if at all, in the initial stages of an optimal policy.

Date: 1976
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