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Capital-Market Imperfections and Investment

  • R. Glenn Hubbard

Over the past decade, a number of researchers have extended conventional models of business fixed investment to incorporate a role for "financial constraints" in determining investment. This paper reviews developments and challenges in this empirical research, and uses advances in models of information and incentive problems to motivate those developments and challenges. First, I describe analytical underpinnings of models of capital-market imperfections in the investment process, and illustrate the principal testable implications of those models. Second, I motivate tests and describe and critique existing empirical studies. Third, the review considers applications of the underlying models to a range of investment activities, including inventory investment, R&D, employment demand, pricing by imperfectly competitive firms, business formation and survival, and risk management. Fourth, I discuss implications of this research program for analysis of effects of investment of monetary policy and tax policy. Finally, I examine some potentially fruitful avenues for future research.

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Article provided by American Economic Association in its journal Journal of Economic Literature.

Volume (Year): 36 (1998)
Issue (Month): 1 (March)
Pages: 193-225

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Handle: RePEc:aea:jeclit:v:36:y:1998:i:1:p:193-225
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