Chapter 8 - Investment with demand, labor and financial constraints: the estimation of a multi-regime model

Abstract

This chapter discusses investment with demand, labor, and financial constraints. The conventional approaches to the investment decision of the firm consider either that the firm is always demand-constrained or that it never faces any constraint at all. Although conventional econometric studies reject the notional-demand model in favor of the effective-demand model with demand constraint, there is a combined influence of demand and profits. The investment decision of firms depends not only on expected costs but also on the constraints observed or expected on the various markets. The desired production capacity can be constrained by the expected trend of demand, the manpower allotted to investment by the labor available, and investment itself by the credit available. This is because the credit market is considered to be in a state of disequilibrium, as interest rates are exogenous, being determined essentially by the public authorities. If the firms' demand for credit is lower than the banks' credit supply, the investment is not subjected to a financial constraint. In particular, the investment is independent of profits. However, if demand exceeds the supply of available credit, investment is rationed.