Journal Article

Investment reluctance: irreversibility or imperfect capital markets?

Silke Hüttel, Oliver Mußhoff and Martin Odening

in European Review of Agricultural Economics

Volume 37, issue 1, pages 51-76
Published in print March 2010 | ISSN: 0165-1587
Published online February 2010 | e-ISSN: 1464-3618 | DOI: https://dx.doi.org/10.1093/erae/jbp046
Investment reluctance: irreversibility or imperfect capital markets?

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Low investment rates are a puzzling phenomenon particularly in transition economies with an urgent need for modernisation. The literature offers two alternative explanations: imperfect capital markets and investment reluctance due to real options effects. In this paper, we develop a generalised model that combines both aspects. The econometric implementation has the structure of a generalised Tobit model. Applying this model to German farm-level panel data, we show that ignoring real option effects may lead to erroneous conclusions in the context of empirical investment equations.

Keywords: irreversibility; uncertainty; q model; capital market imperfections; D81; D92; O12

Journal Article.  9093 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Intertemporal Choice and Growth ; Economic Development

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