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Agency Costs and Investment Behavior

Author

Listed:
  • Dorofeenko, Viktor

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Lee, Gabriel S.

    (Department of Real Estate, University of Regensburg and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Salyer, Kevin D.

    (Department of Economics, University of California)

Abstract

How do differences in the credit channel affect investment behavior in the U.S. and the Euro area? To analyze this question, we calibrate an agency cost model of business cycles. We focus on two key components of the lending channel, the default premium associated with bank loans and bankruptcy rates, to identify the differences in the U.S. and European financial sectors. Our results indicate that the differences in financial structures affect quantitatively the cyclical behavior in the two areas: the magnitude of the credit channel effects is amplified by the differences in the financial structures. We further demonstrate that the effects of minor differences in the credit market translate into large, persistent and asymmetric fluctuations in price of capital, bankruptcy rate and risk premium. The effects imply that the Euro Area's supply elasticities for capital are less elastic than the U.S.

Suggested Citation

  • Dorofeenko, Viktor & Lee, Gabriel S. & Salyer, Kevin D., 2005. "Agency Costs and Investment Behavior," Economics Series 182, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:182
    as

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    File URL: http://www.ihs.ac.at/publications/eco/es-182.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Agency costs; Credit channel; Investment behavior; E.U. Area;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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