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Firms’ Investment in the Presence of Labor and Financial Market Imperfections

  • Giorgio Calcagnini

    ()

    (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino)

  • Germana Giombini

    ()

    (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy))

  • Enrico Saltari

    ()

    (Dipartimento di Economia Pubblica, Università di Roma “La Sapienza”)

This paper analyses how financial and labor market imperfections jointly influence investment. The contemporaneous presence of imperfections in both markets gives rise to a negative correlation between EPL and investment: firms facing negative shocks see their financial constraints worsen in countries with greater labor market rigidities. Internal funds have an overall positive impact on investment, notwithstanding the presence of labor market rigidities acts as a disincentive to the use internal funds for financing new projects. If capital is sunk and the legal environment favors ex-post profit appropriation by workers, firms use internal funds for ends alternative to fixed investment. Our results support the effort put forward by European institutions to reform both markets.

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File URL: http://www.econ.uniurb.it/RePEc/urb/wpaper/WP_09_01.pdf
File Function: First version, 2008
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Paper provided by University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini in its series Working Papers with number 0901.

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Length: 23 pages
Date of creation: 2009
Date of revision: 2009
Handle: RePEc:urb:wpaper:09_01
Contact details of provider: Web page: http://www.econ.uniurb.it/

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