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The paper proves the existence of equilibrium in nonrenewable resource markets when extraction costs are non-convex and resource storage is possible. Inventories flatten the consumption path and eliminate price jumps at the end of the extraction period. Market equilibrium becomes then possible, contradicting previous claims from Eswaran, Lewis and Heaps (1983). We distinguish between two types of solutions, one with immediate and one with delayed build-up of inventories. For both cases we do not only characterize potential optimal paths but also show that equilibria actually exist under fairly general conditions. It is found that optimum resource extraction involves increasing quantities over a period of time. What is generally interpreted as an indicator of increasing resource abundance is thus perfectly compatible with constant resource stocks., Economics Working Paper Series, 14/203

We use a panel of over 116,000 Chinese firms of different ownership types over the period 2000–2007 to analyze the linkages between investment in fixed and working capital and financing constraints. We find that those firms characterized by high working capital display high sensitivities of investment in working capital to cash flow ( WKS ) and low sensitivities of investment in fixed capital to cash flow ( FKS ). We then construct and analyze firm-level FKS and WKS measures and find that, despite severe external financing constraints, those firms with low FKS and high WKS exhibit the highest fixed investment rates. This suggests that an active management of working capital may help firms to alleviate the effects of financing constraints on fixed investment.

Using a panel of 1122 UK firms listed on the London Stock Exchange over the period of 1981 to 2009, endogenous switching regression models (SRM) incorporating a predicted corporate efficiency index are estimated in this paper in an effort to clarify the role of cash flow in examining the impact of capital-market imperfections. It is revealed that a firm's constrained credit status changes with the improvement of its efficiency. The results further reveal that financially constrained firm's investment is comparatively more sensitive to cash flow, but this sensitivity is negatively and significantly related with corporate efficiency. These results point to the fact that high investment sensitivity to cash flow may not be solely driven by measurement error in investment opportunity, but may still be interpreted as a consequence of imperfect substitutability between internal and external financing arising from the capital market imperfections.

We study a stochastic dynamic game of process innovation in which firms can initiate and terminate R&D efforts and production at different times. We discern the impact of knowledge spillovers on the investments in existing markets, as well as on the likely structure of newly forming markets, for all possible asymmetries in production costs between firms. While an increase in spillovers may improve the likelihood of a competitive market, it may at the same time reduce the level to which a technology is developed. We show that the effects of spillovers on investments and surpluses crucially depend on the stage of technology development considered. In particular, we show that high spillovers are not necessarily pro-competitive as they can make it harder for the laggard to catch up with the technology leader.

In U.S. data 1981–2012, unsecured firm credit moves procyclically and tends to lead GDP, while secured firm credit is acyclical; similarly, shocks to unsecured firm credit explain a far larger fraction of output fluctuations than shocks to secured credit. In this article, we develop a tractable dynamic general equilibrium model in which unsecured firm credit arises from self-enforcing borrowing constraints, preventing an efficient capital allocation among heterogeneous firms. Unsecured credit rests on the value that borrowers attach to a good credit reputation which is a forward-looking variable. We argue that self-fulfilling beliefs over future credit conditions naturally generate endogenously persistent business-cycle dynamics. A dynamic complementarity between current and future borrowing limits permits uncorrelated sunspot shocks to unsecured debt to trigger persistent aggregate fluctuations in both secured and unsecured debt, factor productivity, and output. We show that these sunspot shocks are quantitatively important, accounting for around half of output volatility. published

Traditional capital structure theory predicts that reducing banks' leverage reduces the risk and cost of equity but does not change the weighted average cost of capital, and thus the rates for borrowers. We confirm that the equity of better-capitalized banks has lower beta and idiosyncratic risk. However, over the last 40 years, lower risk banks have not had lower costs of equity (lower stock returns), consistent with a stock market anomaly previously documented in other samples. A calibration suggests that a binding ten percentage point increase in Tier 1 capital to risk-weighted assets could double banks' risk premia over Treasury bills.

We consider a setting in which insiders have information about income that outside shareholders do not, but property rights ensure that outside shareholders can enforce a fair payout. To avoid intervention, insiders report income consistent with outsiders' expectations based on publicly available information rather than true income, resulting in an observed income and payout process that adjust partially and over time towards a target. Insiders under-invest in production and effort so as not to unduly raise outsiders' expectations about future income, a problem that is more severe the smaller is the inside ownership and results in an "outside equity Laffer curve". A disclosure environment with adequate quality of independent auditing mitigates the problem, implying that accounting quality can enhance investments, size of public stock markets and economic growth.

We study the effect of dynamic and investment externalities in a one-sector growth model. In our model, two agents interact strategically in the utilization of capital for consumption, savings, and investment in technical progress. We consider two types of investment choices: complements and substitutes. For each case, we derive the equilibrium and provide the corresponding stationary distribution. We then compare the equilibrium with the social planner’s solution.

This paper estimates the impact of competition and exogenous demand decline on the exit process of movie theaters in the US from 1950-1965. I modify Fudenberg and Tirole (1986)'s model of exit in a duopoly with incomplete information to an oligopoly. I estimate this model with panel data, using variations in TV diusion across house- holds and other market characteristics to identify the parameters in the theater's payo¤ function and the distribution of unobservable exit values. Using the estimated model, I show that theaters who are making negative pro…ts may choose to remain in the market if they expect to outlast their competitors, because at that point their pro…ts would increase. This creates a signi…cant delay in the exit process. In addition, by decompos- ing the across-market variation in the exit process, I …nd that TV diusion explains a substantial proportion of the variation in the exit process.

This paper shows that asymmetric information about the timing of earnings can affect corporate capital structure. It sheds some new light on two following questions: why may profitable firms be interested in issuing equity, and why does debt not necessarily signal a firm quality. These issues seem to be puzzling from the classical pecking-order theory or signalling theory point of view. The paper also contributes to the analysis of the link between debt-equity choice and subsequent performance after issue (short-term versus long-term) which has been widely discussed in empirical literature but did not get enough attention in theoretical research.

A structural model is developed and estimated by a maximum likelihood routine to investigate interrelated factor demand subject to nonconvex adjustment costs. The dataset concerns Norwegian plants operating in manufacturing industries and it covers the period 1993-2005. The estimates indicate that it is advantageous to adjust the stock of labour and capital simultaneously. The cost advantage of simultaneous changes is small for capital but is large for labour. The empirical results suggest that when estimating separate factor demand models the bias of parameter estimates is most severe in case of labour demand.

Investment in physical capital at the micro level is infrequent and large, or lumpy. The most common explanation for this is that firms face non-convex physical adjustment costs. The model developed in this paper shows that information costs make investment lumpy at the micro level, even in the absence of non-convex adjustment costs. When collecting and processing information is costly, the firm optimally chooses to do it sporadically and to be inactive most of the time. This behavior results in infrequent and possibly large capital adjustments. The model fits plant-level investment rate moments well, and it also matches some higher order moments of aggregate investment rates. Keywords: investment dynamics, information costs, inattentiveness, lumpy investment JEL classification: D21, D83, D92, E22

This paper estimates the response of investment to changes in uncertainty using data on oil drilling in Texas and the expected volatility of the future price of oil. Using a dynamic model of firms’ investment problem, I find that: (i) the response of drilling activity to changes in price volatility has a magnitude consistent with the optimal response prescribed by theory, (ii) the cost of failing to respond to volatility shocks is economically significant, and (iii) implied volatility data derived from futures options prices yields a better fit to firms’ investment behavior than backward-looking volatility measures such as GARCH. (JEL C58, D92, G13, G31, L71, Q31) The real options literature, beginning with Marschak (1949) and Arrow (1968) and developed in Bernanke (1983), Pindyck (1991), and Dixit and Pindyck (1994), explains how firms should make decisions about investments that involve sunk costs. Real options theory views such investments as options in that, at any point in time, a firm may choose to either invest immediately or delay and observe the evolution of the investment’s payoff. A key insight is that the option to delay has value when future states of the world with positive returns to investing and states with negative returns are both possible, even holding the expected future return constant at its present level. Thus, in the presence of irreversibility and uncertainty, a naive investment timing rule—proceed with an investment if its expected benefit even slightly exceeds its cost—is suboptimal because it does not account for the value of continuing to hold the option. Instead, firms should delay irreversible investments until a significant gap develops between the investments’ expected benefits and costs. Moreover, as uncertainty increases, real options theory tells us that the incentive to delay should grow stronger and the gap between the expected benefit and cost necessary to trigger investment should widen. While real options theory therefore prescribes how firms should carry out irreversible investments in uncertain environments, it is not empirically well-known

Intangible capital is an important factor of production in modern economies that is generally neglected in business cycle analyses. We demonstrate that intangible capital can have a substantial impact on business cycle dynamics, especially if the intangible is complementary with production capacity. We focus on customer capital: the capital embodied in the relationships a firm has with its customers. Introducing customer capital into a standard real business cycle model generates a volatile and countercyclical labor wedge, due to a mismeasured marginal product of labor. We also provide new evidence on cyclical variation in selling effort to discipline the exercise.

When individual petroleum-producing firms make their exploration and development investment timing decisions, positive information externalities and negative extraction externalities may lead them to interact strategically with their neighbors. This paper examines whether these inefficient strategic interactions take place by estimating a structural econometric model of the firms' multi-stage investment timing game. Results show that firms interact strategically on small tracts but not on large tracts. For small tracts, having a neighboring tract explored reduces real profits by about $26 million, while having a neighboring tract developed raises real profits by about $3.5 million. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Empirical estimations of the New Keynesian Phillips curve support hybrid versions with a positive weight on lagged inflation and a weight less than one on expected inflation. We argue that myopic price setting of some agents explains the low weight on expected inflation. The lagged term can be explained by trend extrapolation if information about the future is costly. In a laboratory experiment we implement the Calvo (1983) microfoundations of the Phillips curve. Our hypotheses are supported by the experimental data. About half of the subjects set optimal Calvo prices while about a third is myopic.

In this paper we consider the entry and exit of firms in a Ramsey model with capital and an endogenous labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. The costs of entry (exit) are quadratic in the flow of new firms. The number of firms becomes a second state variable and the entry dynamics gives rise to a richer set of dynamics than in the standard case: in particular, there is likely to be a hump shaped response of output to a fiscal shock with maximum impact after impact and before steady-state is reached. Output and capital per firm are also likely to be hump shaped.

Using internal data of a leasing company in Germany, we examine the determinants of the probability and use of leasing by small firms. We find that small and young firms are likely to be constrained on the leasing market but use leasing to increase their debt capacity. Beyond contract- and firm-specific characteristics, demographic and socio-economic characteristics of the entrepreneur matter. Older and higher qualified entrepreneurs have easier access to leasing than those who are younger or non-educated, but the latter lease more than highly educated entrepreneurs. Female and non-married entrepreneurs of young firms use leasing to increase their debt capacity. These results are important for aging populations where the financing of entrepreneurial activities by highly qualified, older and female persons are important to sustain growth.

This article provides evidence for a particular channel through which sustained terrorism in rural areas may affect growth in developing countries. Using micro-level data from agricultural surveys during the period of insurgency in Punjab (India), I find significant negative effects of terrorism on the level of investment in long-term agricultural technology, but effects are small and insignificant for short-term investment. The presence of a major terrorist incident in a district in a year reduces long-term fixed investment by around 17 percent after controlling for district fixed-effects, time trends, district trends, and other farm-level controls. These negative effects are greater for richer farmers and those living in bordering districts. This results in a farmer losing close to 4 percent of his income annually because of the insurgency.

Research on climate change suggests that small improvements in the "sustainability" of buildings can have large effects on greenhouse gas emissions and on energy efficiency in the economy. This paper analyzes the economics of "green" building. First, we analyze a panel of office buildings "certified" by independent rating agencies, finding that large recent increases in the supply of green buildings and the unprecedented volatility in property markets have not significantly affected the relative returns to green buildings. Second, we analyze a large cross section of office buildings, demonstrating that economic premiums in rent and asset values are substantial. Third, we relate the economic premiums for green buildings to their sustainability, confirming that the attributes rated for both thermal efficiency and sustainability contribute to premiums in rents and asset values. Even among green buildings, increased energy efficiency is fully capitalized into rents and asset values.

I study a dynamic economy featuring adverse selection in asset markets. Borrowing constrained entrepreneurs sell past projects to finance new investment, but asymmetric information creates a lemons problem. I show that this friction is equivalent to a tax on financial transactions. The implicit tax rate responds to aggregate shocks, generating amplification in the response of investment and cyclical variation in liquidity. (JEL D82, D92, E32, E44, G31, L15)

We derive robust predictions on the effects of uncertainty on short-run investment dynamics in a broad class of models with (partial) irreversibility. When their environments becomes more uncertain, firms become more cautious and less responsive to demand shocks. This result contrasts with the long-run analysis, in which the effect of real options on the level of the capital stock is ambiguous. An investment model is estimated to test these theoretical predications using a panel of UK firms and a stock returns-based measure of uncertainty. As predicted we find that uncertainty reduces firms' responsiveness to demand shocks.

To understand why some firms export while others do not, it is necessary to understand major determinants which lead some firms to engage in exporting. A large base of empirical literature provides evidence that firms which trade are systematically different from those which do not trade in size, productivity, and the involvement of multinational corporations. In this paper, we introduce a financial dimension as an additional source of firm heterogeneity to understand export market participation, and examine how the impact of leverage on firms' exporting decisions varies depending on financial constraints, using a panel of 3,353 Korean manufacturing firms over the period of 1994-2011. First, we find that leverage for financially-constrained firms is negatively associated with the probability of exporting while leverage for financially-unconstrained is not. Also, we find that in the sample of financially-constrained firms, future exporters have higher leverage before they begin to export, while in the sample of financially-unconstrained firms, firms with ex-ante lower leverage self-select to export. Finally, it is found that export market participation decreases leverage for both financially-constrained and financially-unconstrained firms, but the magnitudes of decreases in leverage are larger for financially-constrained firms.

Natural gas plays an important role in the future development of electricity markets, as it is the least emission-intensive fossil generation option and additionally provides the needed plant operating flexibility to deal with intermittent renewable generation. As both the electricity and the natural gas market rely on networks, congestion in one market may lead to changes in the other. In addition, investment in one market impacts investment in the other market to the extent that these investments may even become substitutes for each another. The objective of this paper is to develop a dynamic model representation of coupled natural gas and electricity network markets to test the potential interaction with respect to investments. The model is tested under simplified conditions as well as for a stylized European network setting. The results indicate that there is sufficient potential for investment substitution and market interactions that warrant the application of coupled models, especially with regard to simulations of long-term system developments.

This paper broadly addresses the financing problems of the innovation process, by analysing the extent to which financial constraints hinder firms' investment in R&D and innovation, as well as investigating the role of public financial support in alleviating such constraints. In order to overcome the problems associated with measuring financial constraints, we make use of both indirect and direct measures of constraints. Our findings suggest that while financial constraints have a perverse effect upon R&D investment and innovation, there is no evidence that subsidies mitigate such constraints. Accordingly, we raise a number of questions regarding the efficiency and effectiveness of subsidies in alleviating firms' financial constraints.

This article looks at the empirical consequences of introducing endogenous capital depreciation in the standard neoclassical model with quadratic adjustment costs. To this end, we formulate an empirical specification that accommodates capital maintenance and utilization in the Euler equations for aggregate investment. The empirical estimates with data from the Canadian Survey on Capital and Repair Expenditures show that, in contrast to the existing literature, the performance of the Euler equations is improved when we account for the impact of variable capital depreciation.

Delayed payment (trade credit) and prepayment are widely observed forms of interfirm credit. We propose a simple theory to account for the prevalence of such credit. A downstream firm trades off inventory holding costs against lost sales. Lost final sales impose a negative externality on the upstream firm. The solution requires a subsidy limited by the value of inputs. Allowing the downstream firm to pay with a delay, an arrangement known as “trade credit,” is precisely such a solution. Further, solving a reverse externality accounts for the use of prepayment\ud for inputs, even in the absence of any risk of default by the downstreamfirm. We clarify howinput prices vary with such policies as well as when such instruments are more efficient than pure input price adjustments. Thus we account for inter-firm credit as an optimal instrument delivering a targeted inventory subsidy designed to prevent lost sales. The theory offers an explanation for the\ud widespread use of net terms, and the fact that prepayment always carries a zero interest rate. Our results are also consistent with non-responsiveness of trade credit charges to fluctuations in the bank rate as well as market demand, and the fact that trade credit is negatively related to supplier profit level and inventory, but positively related to supplier profit margin.

This paper presents a dynamic model of talent investments in a team sports league with an infinite time horizon. We show that the clubs' investment decisions and the effects of revenue sharing on competitive balance depend on the following three factors: (i) the cost function of talent investments, (ii) the clubs' market sizes, and (iii) the initial endowments of talent stock. We analyze how these factors interact in the transition to the steady state as well as in the steady state itself.

We solve an agent's optimization problem of meeting demands for cash over time with cash deposited in bank or invested in stock. The stock pays dividends and uncertain capital gains, and a commission is incurred in buying and selling of stock. We use a stochastic maximum principle to obtain explicitly the optimal transaction policy.

Entrepreneurs bear substantial risk, but empirical evidence shows no sign of a positive premium. This paper develops a theory of endogenous entrepreneurial risk taking that explains why self-financed entrepreneurs may find it optimal to invest in risky projects offering no risk premium. Consistently with empiri cal evidence, the model predicts that poorer entrepreneurs are more likely to undertake risky projects. It also finds that incentives for risk taking are stronger when agents are impatient. (JEL G31, G32, L25, L26) Entrepreneurial activity is risky and poorly diversified. Most economic models would suggest that the high degree of entrepreneurial risk should be compensated by a significant premium in returns.1 Yet empirical evidence finds that the premium to entrepreneurial activity is surprisingly low,2 which raises the question of why people become entrepreneurs. A number of hypotheses have been offered to answer this question, mostly based on the idea that entrepreneurs have a different set of preferences or beliefs (e.g., risk tolerance or overoptimism). This paper provides an alternative theory of endogenous entrepreneurial risk taking that does not rely on individual heterogeneity of preferences or beliefs. We incorporate endogenous choice of entrepreneurial risk in a simple dynamic occupational choice model. A borrowing constrained agent chooses whether to be a worker or an entrepreneur. The occupational choice is discrete, in the sense that each activity requires full-time involvement. A worker receives fixed wage income, while an entrepreneur gets access to an entrepreneurial technology and decides how much to invest in it. Borrowing constraints induce endogenous sepa ration into different occupations: the rich, who have sufficient funds for investment, choose to be entrepreneurs, and the poor prefer to receive fixed pay by becoming workers. The indivisibility of occupational choice may create a nonconcavity in the agent's value function as a function of

Summary This paper presents estimates of the aggregate net (wealth) capital stock and aggregate capital services for Switzerland. We derive these estimates in a consistent manner using the perpetual inventory method. Due to changes in data availability, the annual time series cover the period 1970–2005 for a 2-asset breakdown (equipment and structures) and 1990–2005 for a 12-asset breakdown (nine categories of equipment and three of structures). The sensitivity of the results is examined by varying assumptions on the initial capital stocks, the length of asset lives, the method for calculating service prices, and the choice of ICT deflators. The paper also presents quarterly measures of capital and estimates of capital services based on mid-year asset stocks.

We analyse the effects of different regulatory schemes (price cap and profit sharing) on the endogenous size of a firm's investment. Using a real option approach in continuous time, we show that profit sharing does not delay a firm's start-up investment compared to a pure price-cap scheme. Profit sharing does not necessarily affect total investment either, if the threshold for profit sharing is high enough. Only a profit sharing intervening for low profit levels could delay further investments. We also evaluate the effects of profit sharing on social welfare, determining profit level that should optimally trigger tighter regulation: profit sharing should be less stringent in sectors where there is more opportunity for larger investment.

The objective of this paper is to combine a real options framework with portfolio optimization techniques and to apply this new framework to investments in the electricity sector. In particular, a real options model is used to assess the adoption decision of particular technologies under uncertainty. These technologies are coal-fired power plants, biomassfired power plants and onshore wind mills, and they are representative of technologies based on fossil fuels, biomass and renewables, respectively. The return distributions resulting from this analysis are then used as an input to a portfolio optimization, where the measure of risk is the Conditional Value-at-Risk (CVaR).

The role of product market reforms in achieving the objective of higher employment and growth has recently received much attention amongst academics. The aim of this paper is to analyse some of the channels through which cross-market effects come about and to assess their policy relevance. The analytic strategy of this paper relies upon the stochastic real options modelling approach. In a nutshell, our simulations using numerical methods indicate that comprehensive product market reforms would increase factor demand and growth significantly in the medium and long run.

This theoretical model investigates the extent of the effects of local technological spillovers on growth. We add to a growth model with vertical quality ladder innovations the assumption that firms are exogenously located around a circle and technological spillovers affecting R&D efficacy occur between neighbors. As a result, the presence of local spillovers makes it optimal for a firm to innovate intensively only if the neighbors do so. However, they do not produce clear effects on either growth or welfare. On one hand positive spillovers improve the quality of local goods—hence growth—but, on the other, a high level of positive spillovers generate discrepancies across intermediate sectors which reduce the level of household welfare.

We examine the coexistence of banks and financial markets, studying a credit market where the qualities of investment projects are not observable and the investment decisions of entrepreneurs are not contractible. Standard banks can alleviate moral-hazard problems by securing a portion of a repayment in the case of non-investment. Financial markets operated by investment banks and rating agencies have screening know-how and can alleviate adverse-selection problems. In competition, standard banks are forced to increase repayments, since financial markets can attract the highest-quality borrowers. This, in turn, increases the share of shirkers and may make lending unprofitable for standard banks. The coexistence of financial markets and standard banks is socially inefficient. The same inefficiency can happen with the entrance of sophisticated banks, operating with a combination of rating and ongoing monitoring technologies.

The objective of this article is two-fold. First, we develop a theoretical model to investigate the impact of political risk on irreversible investment. Second, we apply our model to an analysis of the effects of risk of separation of the province of Quebec from the Canadian federation. We model the probability of a regime switch using the properties of the electoral process and examine the response of investment to changes in the risk of separation. We consider the impact of investors' perception of the risk of separation and financial market volatility separately. We show that political risk has a depressing impact on investment even if the 'bad' regime has never been observed in the sample. (JEL Codes: E22, D92, O16, O11) Copyright , Oxford University Press.

When China’s accession to the WTO exposed European firms to import competition, they responded by increasing their investment in innovation. This response was stronger in industries and firms where factors of production were less mobile. Motivated by this evidence, we incorporate “trapped factors” at the micro level into a general equilibrium model of product-cycle trade and growth. In a calibrated version of the model that starts with a baseline growth rate of 2%, trade integration between the OECD and low-wage countries can increase the steady-state growth rate to 2.4% per year. Factors that are trapped at a firm by an unexpected change in trade policy do not change this long-run growth rate, but in the medium run, they could have a noticeable effect on aggregate growth. Simulations of the model show that in the first decade after liberalization, growth jumps to 2.7% per year and that trapped factors account for almost all of the 0.3% = 2.7% − 2.4% increase above the steady state growth rate.

This paper provides an alternative perspective on the firm-level empirical analysis of the relation between foreign ownership and capital demand adjustment in host countries. The author estimates a dynamic structural model of investment on a sample of 4672 Belgian firms for the period 2003-2010, permitting him to distinguish the ‘ownership status’ of firms. He considers a dynamic discrete choice model of a general specification of adjustment costs including convex and non-convex components. The author uses the method of simulated moments in order to estimate the structural parameters. His results indicate that multinationals’ affiliates face lower capital adjustment costs than national firms.

International audience; In contrast to a large strand of the literature that focuses on multi-product firms, this paper examines multi-destinations firms and the effects of financial constraints on newly served and newly exited destinations. Intuitively, financial constraints have a negative impact on firm expansion in new destinations by limiting firm ability to finance entry costs. The effect on exit from existing destinations is ambiguous. Due to financial constraints, a firm may face difficulties financing the recurrent costs of maintaining her market presence. But if financial constraints also affect entry, the firm may have strong incentives to stay in a given destination since it may not be able to fund the fixed entry costs associated to the reallocation of her portfolio of destinations. We develop a simple theoretical model which includes these two effects. We use a unique longitudinal dataset on French firms that contains information on export destinations of individual firms and allows to construct various firm-level measures of financial constraints to test these predictions. The empirical results suggest that financial constraints hamper a firms’s ability to cover fixed entry costs as well as recurrent costs associated with maintaining the presence in a foreign market, thereby reducing the probability of entering into a new foreign markets and increasing the probability of exiting from an existing foreign market.

Evaluating an industrial opportunity often means to engage in financial modeling which results in estimation of a large amount of economic and accounting data, which are then gathered in an economically rational framework: the pro forma financial statements. While the standard net present value (NPV) condenses all the available pieces of information into a single metric, we make full use of the crucial information supplied in the pro forma financial statements and give a more detailed account of how economic value is created. In particular, we construct a general model, allowing for varying interest rates, which decomposes the project into investment side and financing side and quantifies the value created by either side; an equity/debt decomposition is also accomplished, which enables to appreciate the role of debt in adding or subtracting value to equityholders. Further, the major role of accounting rates of return as value drivers is highlighted, and new relative measures of worth are introduced: the project ROA and the project WACC, which aggregate information deriving from the period rates of return. To achieve these results, we make use of the Average-Internal-Rate-of-Return (AIRR) approach, recently introduced, which rests on capital-weighted arithmetic means and sets a direct relation between holding period rates and NPV.

The existence of some 2 billion unused EU Allowances (EUAs) at the end of Phase II of the EU's Emissions Trading System (EU ETS) has sparked considerable debate about structural shortcomings of the EU ETS. At the same time, there has been a surprising lack of interest in one possible explanation of this accumulation of EUAs: the theory of intertemporal permit trading, i.e. allowance banking. In this paper we adapt basic banking theory to the case of a smoothly declining cap such as that in the EU ETS. We show that it is rational for agents to decrease emissions beyond the constraint imposed by the cap initially, accumulating an allowance bank and then drawing it down in the interest of minimizing abatement cost over time. Having laid out the theory, we carry out a set of simulations for a reasonable range of key parameters, calibrated to the EU ETS, to illustrate the effects of intertemporal optimization of abatement decisions on optimal time paths of emissions and allowance prices. We also explore the effect of an unexpected change in counterfactual emissions. We conclude that bank accumulation as the result of intertemporal abatement cost optimization should be considered at least a partial explanation when evaluating the current discrepancy between the cap and observed emissions in the EU ETS.

If the relation between investment and economic growth is well established in the macroeconomic literature, the existence of a similar link at the level of the firm has been challenged by empirical work. This paper investigates the channels linking investment and firm performance in the French and Italian manufacturing industries. It does so by putting forth a novel methodology to identify investment spikes that corrects for size dependence. While maintaining the desired properties of a spike measure, our chosen proxy retrieves the expected relation between investment and firm performance. Ex-ante, more efficient and fast growing firms display a higher probability to invest; in turn, after an investment spike has taken place the group of investing firms shows further gains in performance. Finally, expansionary investment episodes, as proxied by the opening of new plants, have a negative effect on profitability while they are associated with higher sales and employment levels.

What determines the technology that a country adopts? While many factors affect technological adoption, the efficiency of the country's financial system may also play a significant role. To address this question, a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation. The ability of an intermediary to monitor and control the cash flows of a firm plays an important role in the technology adoption decision. Can such a theory help to explain the differences in total factor productivity and establishment-size distributions across India, Mexico, and the United States? A quantitative illustration suggests the answer is yes.

We present a theoretical model in tourism economics, assuming that the market for tourism is an oligopoly with differentiated products. Destinations (i.e., countries, regions, sites or even firms) can invest in order to improve their carrying capacity that can be interpreted as the stock of physical, natural or cultural resources. Tourism flows yield current revenues, but they are usually detrimental for the cultural or natural resource stock over time. We find the solution of the dynamic model, and in particular we find the open-loop Nash equilibrium of the game among the destinations, under alternative settings, depending on whether the arrivals are exogenous or endogenous, and depending on whether the degree of differentiation among destinations is exogenous or endogenous. The model is rather general, and it can provide answers to different specific questions, like the choice between mass- vs. elite-tourism development strategies; the effect of the number of competing products upon profits; the optimal degree of product differentiation.

In most industries, ranging from information systems development to construction, an overwhelming proportion of projects are delayed beyond estimated completion time. This fact constitutes somewhat of a puzzle for existing theory. The present paper studies project delays and optimal contracts under moral hazard in a setting with time to build. Within this setup, project delays are found to be most likely to happen at early stages of development, and intimately connected to the degree of commitment of the procurer and the class of contracts that can be enforced. The first-best, optimal spot contracting and optimal long-term contract scenarios are analyzed, as well as commonly encountered additional constraints on the long-term contract.

The allowance allocation under the European emission trading schemes differs fundamentally from earlier cap-and-trade programmes, such as SO2 and NOx in the USA. Because of the sequential nature of negotiations of the overall budget, the allocation also has to follow a sequential process. If power generators anticipate that their current behaviour will affect future allowance allocation, then this can distort today's decisions. Furthermore, the national allocation plans (NAPs) contain multiple provisions dealing with existing installations, what happens to their allocation when they close, and allocations to new entrants. We provide a framework to assess the economic incentives and distortions that provisions in NAPs can have on market prices, operation and investment decisions. To this end, we use both analytic models to illustrate the effects of the incentives, and results from numerical simulation runs that estimate the magnitude of impacts from different allocation rules.

In his famous 1987 monograph, Robert Lucas argued that further stabilizing the business cycles that persisted in the post-War era was pointless, because these cycles had a negligible effect on societal well-being. In particular, Lucas demonstrated that society should be willing to pay only a tiny fraction of its consumption expenditures per year to completely eliminate the fluctuations that prevailed over this period. This conclusion has been largely reaffirmed by subsequent studies, and has been commonly cited as evidence that policymakers should abstain from intervening to offset macroeconomic fluctuations of the magnitude that prevailed over this period. ; This paper disputes this conclusion and argues that the business cycles that prevailed over this period were costly, and thus opens the door to the possibility that stabilization policy might be desirable after all. It does this by demonstrating that business cycles can have a deleterious effect on the rate at which the economy grows over the long run. The reason is that cycles lead to volatile investment, reducing the efficiency of investment. Essentially, the fact that investment activity is concentrated in booms rather than spread out uniformly over time creates congestion effects that lower the productivity of investment. I estimate that eliminating the cyclical fluctuations that prevailed during the post-War period would have increased the growth rate of real GDP per capita in the U.S. from 2.0% per year to 2.5% per year. The cost of reduced growth from macroeconomic volatility is computed at a rate of 10% of consumption expenditures per year, over 100 times.

We introduce an efficiency wage mechanism into an innovation-driven growth model. Due to asymmetric information problems the labour market is segmented and homogeneous workers may be employed either in the non-competitive intermediate sector or in the competitive research sector. We analyse the impact that the monopoly position enjoyed by intermediate firms in the product market may have on employment, wage inequality and growth, and the sectoral distribution of workers. We find that the lower the product market competition in the capital goods sector, the higher the research employment, the lower the intermediate sector employment and the higher the growth rate. The relationships between growth and inequality, on the one hand, and between growth and employment, on the other, are both negative.

In this paper we investigate the trade-off faced by regulators who must set a price for an intermediate good somewhere between the marginal cost and the monopoly price. We utilize a growth model with monopolistic suppliers of intermediate goods. Investment in innovation is required to produce a new intermediate good. Marginal cost pricing deters innovation, while monopoly pricing maximizes innovation and economic growth at the cost of some static inefficiency. We demonstrate the existence of a second-best price above the marginal cost but below the monopoly price, which maximizes consumer welfare. Simulation results suggest that substantial reductions in consumption, production, growth, and welfare occur where regulators focus on static efficiency issues by setting prices at or near marginal cost.