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Neoclassical vs Evolutionary Theories of Financial Constraints : Critique and Prospectus

  • Alex Coad

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, Max Planck Institute of Economics - Evolutionary Economics Group)

Complicated neoclassical models predict that if investment is sensitive to current financial performance, this is a sign that something is "wrong" and is to be regarded as a problem for policy. Evolutionary theory, on the other hand, refers to the principle of "growth of the fitter" to explain investment-cash flow sensitivities as the workings of a healthy economy. In particular, I attack the neoclassical assumption of managers maximizing shareholder-value. Such an assumption is not a helpful starting point for empirical studies into firm growth. one caricature of neoclassical theory could be "Assume firms are perfectly efficient. Why aren't they getting enoug funding ?", whereas evolutionary theory considers that firms are forever struggling to grow. This essay highlights how policy guidelines can be framed by the initial modelling assumptions, even though these latter are often chosen with analytical tractability in mind rather than realism.

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