IDEAS home Printed from https://ideas.repec.org/p/lev/wrkpap/wp_81.html
   My bibliography  Save this paper

The Impact of Profitability, Financial Fragility and Competitive Regime Shifts on Investment Demand: Empirical Evidence

Author

Listed:
  • James Crotty
  • Jonathan Goldstein

Abstract

Crotty and Goldstein have developed a hybrid post-Keynesian/ neo-Schumpeterian theory of investment demand. In this micro-founded theory of accumulation, the optimal investment decision depends on the level of expected profitability, the degree of competition, and the degree of financial fragility. Its core assumptions are: i)the future is unknowable in principle, ii) physical capital is ii) illiquid and the accumulation process is substantially irreversible, iii) managers and owners are distinct economic agents with an unresolved principal-agent conflict, and iv) management seeks the long-term growth and financial stability of the firm itself, and guards its decision-making authority against encroachment by stockholders and creditors. In this model, there is an unavoidable growth-safety tradeoff: the firm's drive for growth and profits is constrained by management's desire for financial security and decision-making autonomy. In this paper, Crotty and Goldstein seek to provide empirical support for their earlier model through a polynomial-distributed lag regression analysis of the determinants of the rate of accumulation in the U.S. manufacturing sector between 1954 and 1988. The manufacturing sector was chosen as affording the best test of the Schumpeterian competition effect. The authors test econometrically for the presence of regime shifts at the end of the 1960s and the beginning of the 1980s-two periods in which foreign competition appears to have increased significantly. The econometric results establish a strong Schumpeterian competition effect, in which intensified competition compels firms to undertake additional investment to defend existing illiquid capital. In addition, there is strong support for the notion of a post-Keynesian growth/financial security/autonomy tradeoff in the determination of the level of investment. Finally, the profit rate/competition/financial security nexus allows the authors to explain important trends in the post-war accumulation of capital.

Suggested Citation

  • James Crotty & Jonathan Goldstein, 1992. "The Impact of Profitability, Financial Fragility and Competitive Regime Shifts on Investment Demand: Empirical Evidence," Economics Working Paper Archive wp_81, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_81
    as

    Download full text from publisher

    File URL: http://www.levyinstitute.org/pubs/wp81.pdf
    Download Restriction: no

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_81. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Elizabeth Dunn). General contact details of provider: http://www.levyinstitute.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.