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Financially constrained capital investments: The effects of disembodied and embodied technological progress

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  • Feichtinger, Gustav
  • Hartl, Richard F.
  • Kort, Peter M.
  • Veliov, Vladimir M.

Abstract

Empirical studies stress the significance of financing constraints in business investment. Especially high tech investment is likely to be affected by capital market imperfections. The reason is that their returns are highly uncertain so that it is difficult to get outside finance for this kind of investment. This paper studies the combined effect of technological progress and the capital market being imperfect on the firm's investment behavior. We show that it is crucial to make a distinction between embodied and disembodied technological progress. Embodied technological progress affects only the capital goods built after the technological breakthrough while disembodied technological progress influences the productivity of all capital goods installed. It is shown that where disembodied technological progress leads to a positive anticipation phase before the technological breakthrough occurs, a negative anticipation phase will occur before an embodied technological breakthrough. During this negative anticipation phase the firm builds up a stock of liquid financial assets in order to be able to finance increased investments in the improved capital goods from after the technological breakthrough.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 44 (2008)
Issue (Month): 5-6 (April)
Pages: 459-483

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Handle: RePEc:eee:mateco:v:44:y:2008:i:5-6:p:459-483

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Web page: http://www.elsevier.com/locate/jmateco

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  1. Feichtinger, G. & Hartl, R.F. & Kort, P.M. & Veliov, V.M., 2005. "Anticipation effects of technological progress on capital accumulation : a vintage capital approach," Open Access publications from Tilburg University urn:nbn:nl:ui:12-148454, Tilburg University.
  2. Boucekkine, Raouf & Del Rio, Fernando & Licandro, Omar, 1999. "Endogenous vs exogenously driven fluctuations in vintage capital models," CEPREMAP Working Papers (Couverture Orange) 9901, CEPREMAP.
  3. Feichtinger, G. & Hartl, R.F. & Kort, P.M. & Veliov, V., 2003. "Environmental Policy, the Porter Hypothesis and the Composition of Capital: Effects of Learning and Technological Progress," Discussion Paper 2003-61, Tilburg University, Center for Economic Research.
  4. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, vol. 87(3), pages 342-62, June.
  5. Robert E. Carpenter & Bruce C. Petersen, 2002. "Capital Market Imperfections, High-Tech Investment, and New Equity Financing," Economic Journal, Royal Economic Society, vol. 112(477), pages F54-F72, February.
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  7. Malcomson, James M., 1975. "Replacement and the rental value of capital equipment subject to obsolescence," Journal of Economic Theory, Elsevier, vol. 10(1), pages 24-41, February.
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  9. Boucekkine, Raouf & Pommeret, Aude, 2004. "Energy saving technical progress and optimal capital stock: the role of embodiment," Economic Modelling, Elsevier, vol. 21(3), pages 429-444, May.
  10. R. Boucekkine & M. Germain & O. Licandro & A. Magnus, . "Creative destruction, investment volatility, and the average age of capital," Working Papers 97-08, FEDEA.
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  14. Kort, Peter, 1988. "Optimal dynamic investment policy under financial restrictions and adjustment costs," Open Access publications from Tilburg University urn:nbn:nl:ui:12-153450, Tilburg University.
  15. Boucekkine, Raouf & Licandro, Omar & Paul, Christopher, 1997. "Differential-difference equations in economics: On the numerical solution of vintage capital growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 347-362.
  16. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  17. Kort, P. & Hartl, R.F. & Veliov, V.M. & Feichtinger, G., 2005. "Capital accumulation under technological progress and learning: a vintage capital approach," Open Access publications from Tilburg University urn:nbn:nl:ui:12-154966, Tilburg University.
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Citations

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Cited by:
  1. Azomahou, Théophile & Boucekkine, Raouf & Nguyen-Van, Phu, 2008. "Promoting clean technologies: The energy market structure crucially matters," MERIT Working Papers 032, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  2. BOUCEKKINE, Raouf & HRITONENKO, Natali & YATSENKO, Yuri, . "Scarcity, regulation and endogenous technical progress," CORE Discussion Papers RP -2334, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Kredler, Matthias, 2014. "Vintage human capital and learning curves," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 154-178.
  4. Prskawetz, Alexia & Veliov, Vladimir M., 2007. "Age-specific dynamic labor demand and human capital investment," Journal of Economic Dynamics and Control, Elsevier, vol. 31(12), pages 3741-3777, December.

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