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How Do Future Constraints Affect Current Investment?
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Enrico Saltari
Published/Copyright:
June 17, 2003
In this paper we build up a theoretical continuous time model to study how future constraints affect current investment decisions. We show that firms constrained in the future, but currently unconstrained, select an optimizing investment trajectory different from that of an identical firm that will never be constrained. We provide a complete characterization of the formal solution to the constrained problem: in particular, we show that two simple conditions allow us to compute the trajectory for the (potentially) constrained firm. A basic result of our analysis is that the effect of future financing constraints are captured by the current q value of the firm.
Published Online: 2003-6-17
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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- The Human Capital Constraint: Of Increasing Returns, Education Choice and Coordination Failure
- ``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare
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