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Investment, irreversibility and financial imperfections: the rush to invest and the option to wait

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  • Richard Holt

    (Economics, University of Edinburgh)

Abstract

The impact of combinations of frictions on investment activity is poorly understood. We develop a model of investment under financial frictions and irreversibility. We show that the possibility of encountering financial constraints in future raises irreversible investment today over that arising under irreversibility alone. By contrast, investment under both frictions is lower than under future financial constraints alone.

Suggested Citation

  • Richard Holt, 2007. "Investment, irreversibility and financial imperfections: the rush to invest and the option to wait," Economics Bulletin, AccessEcon, vol. 5(10), pages 1-10.
    • Handle: RePEc:ebl:ecbull:eb-07e20005
    as

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    File URL: http://www.accessecon.com/pubs/EB/2007/Volume5/EB-07E20005A.pdf
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    References listed on IDEAS

    as
    1. Caggese, Andrea, 2007. "Financing constraints, irreversibility, and investment dynamics," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2102-2130, October.
    2. Bayer, Christian, 2006. "Investment dynamics with fixed capital adjustment cost and capital market imperfections," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1909-1947, November.
    3. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    4. Holt, Richard W. P., 2003. "Investment and dividends under irreversibility and financial constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 27(3), pages 467-502, January.
    5. Alan Carruth & Andy Dickerson & Andrew Henley, 2000. "What do We Know About Investment Under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-154, April.
    6. Carruth, Alan & Dickerson, Andrew & Henley, Andrew, 2000. "What Do We Know about Investment under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-153, April.
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    Cited by:

    1. Coldbeck, Beata & Ozkan, Aydin, 2018. "Comparison of adjustment speeds in target research and development and capital investment: What did the financial crisis of 2007 change?," Journal of Business Research, Elsevier, vol. 84(C), pages 1-10.

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    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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