Forward-looking Investment Decisions Research Articles

The Distortionary Effects of Central Bank Direct Lending on Firm Quality Dynamics

Bypassing the banking systems, central banks around the world lent to nonfinancial firms on an unprecedented scale during the Covid-19 crisis. Effective and necessary as it is, direct lending is subject to credit mispricing given central banks' lack of information on individual borrowers. Our dynamic model characterizes a downward bias in firm quality distribution that is self-perpetuating: Direct lending in the current crisis necessitates a greater scale of interventions in future crises, which in turn cause more severe distortion of firm quality distribution. Such effects are amplified by firms' forward-looking investment decisions in normal times. Low-quality firms overinvest to take advantage of underpriced central bank credit in future crises while, on a relative basis, high-quality firms underinvest. The distortionary effects can be mitigated by central banks' use of market information, collaboration and regulation of informed banks, and coordination of direct lending and conventional monetary policy.

What drives sustainable indices? A framework for analyzing the sustainable index landscape

This article presents an encompassing four-step customizable framework for analyzing the heterogeneous sustainable index landscape. Compared to previous studies, we present means and methods to move the measurement and impact of sustainability performance in the center of attention and emphasize the often neglected aim of sustainable indices: incorporating sustainability into investment tools. Besides traditional comparisons of return and risk indicators (step one), we analyze the sustainability profile of sustainable indices while actively managing the presence of ESG rating disagreement (step two). For the determination of index-specific return and risk sources, we integrate sustainability factors in factor analyses and risk decomposition approaches (step three). A performance attribution analysis based on sustainability classes increases the transparency on the composition strategies of sustainable indices (step four). Our framework facilitates the analyses of sustainable investment tools and thus supports investors in making more meaningful and forward-looking investment decisions in line with their sustainability-related preferences.

Political dynamics, public goods and private spillovers

Positive and negative spillovers from private activities onto aggregate economic outcomes are empirically significant. How might politics interact with private investment incentives and their externalities? Our theory connects politics to policies which distort private spillovers. This has implications for empirical identification. In our model, for large negative externality there is a unique equilibrium with perpetually high tax rates and majority poor voters. This is a consequence of political manipulation that anticipates private spillovers on forward-looking investment decisions. When positive spillovers are sufficiently large, individuals can coordinate on policies that encourage private investment. This sustains an equilibrium with perpetually low tax rates and majority rich voters. The resulting multiple equilibria can be used to interpret existing conundrums in empirical findings. We can also rationalize an observed cross-country empirical regularity in terms of public funding for knowledge goods and income inequality.

The Distortionary Effects of Central Bank Direct Lending on Firm Quality Dynamics

In crises, low-quality firms face greater financial shortfalls and invest less than high-quality firms. Public liquidity support preserves the overall production capacity but dampens the cleansing effects of crises on firm quality. The trade-off between quantity and quality determines the optimal size of intervention. Policy distortions are self-perpetuating: A downward bias in quality necessitates interventions of greater scales in future crises. Distortions are amplified by low-quality firms’ expectations of liquidity support and overinvestment pre-crisis. Finally, the optimal intervention is larger and distortionary effects stronger in a low interest rate environment where low yields on precautionary savings discourage firms from self-insurance.

What makes decisions about urban water infrastructure forward looking? A fuzzy-set qualitative comparative analysis of investment decisions in 40 Dutch municipalities

Municipalities worldwide are confronted with the need to take long-term decisions about ageing water infrastructure in the face of unpredictable future developments. Previous studies on long-term decision making have proposed solutions targeted at the domain of either politics or planning. This study combines insights from the domains of policy, politics, and planning by using the Multiple Streams Framework to explain what enables municipalities to take forward-looking investment decisions. We combine the configurational MSF perspective with an explicitly configurational method namely fuzzy-set qualitative comparative analysis and apply this to 40 cases of Dutch municipalities. We conclude that enabling conditions differ for small versus medium-to-large municipalities. Furthermore, forward-looking investment decisions can be achieved regardless of the municipalities’ organizational analytical capacity. In fact, and contrasting to the requirement of the MSF, not all streams necessarily have to be present for forward-looking decisions to occur. For medium-to-large municipalities, forward-looking investment decisions are stimulated by: (1) the presence of organizational analytical capacity, (2) transactional/networking political leadership in situations without focusing events, or (3) entrepreneurial/transformative political leadership in situations with focusing events. For small municipalities, forward-looking investment decisions are stimulated by networking/interpersonal political leadership combined with the occurrence of focusing events.

What makes long-term investment decisions forward looking: A framework applied to the case of Amsterdam's new sea lock

Long-term investments challenge decision makers to look into the far future. Existing future studies often build upon a rational idea of decision making that does not help to explain why decision makers anticipate the future. In addition, existing studies do not provide a clear definition of what is considered as “forward looking”. This article proposes a framework that can be used to evaluate and explain for what reasons and based on what criteria decision makers take forward-looking investment decisions. We apply this framework to a specific decision-making case about a Dutch sea lock, making use of interviews (n = 16) and a content analysis of primary documents (n = 430). We find that not all investment decisions are necessarily forward looking. Secondly, we conclude from our case that decisions became forward looking because administrators used scenarios, visions, and flexible solutions to build support, avoid political risks and comply to formal rules. Scenario developers and urban planners could therefore involve administrators in early stages of the decision-making process to increase their awareness of the future towards which they are steering and provide them with alternative future paths. Furthermore, they could identify and use relevant institutional rules with forward-looking features to stimulate forward-looking decisions.

Growth, Normal Capacity Utilization and the Long-Run Saving Ratio: A Comment

ABSTRACTIn a recent paper Attilio Trezzini presents an explanation of the saving ratio that does not rely on normal capacity utilization positions. Trezzini instead focuses on the fluctuations of consumption and investment. But that very focus, I argue, requires a different kind of approach. Once the traditional theory of saving is discarded, the ‘indeterminacy’ of the saving ratio opens the way to an analysis of the evolution of consumption, and of how that evolution affects aggregate demand. The generation and evolution of autonomous demand are matters of obvious relevance to the classical Keynesian approach to the analysis of growth. The present comment takes James Duesenberry’s criticism of demand theory as the starting point for an examination of the evolving standard of consumption and autonomous (‘innovative’) investment, therefore addressing directly the investment–consumption relationship. There are of course a number of complicated questions involved and they have not yet been satisfactorily analysed. They are part of the necessary task of articulating a theory of consumption consistent with demand-led growth and forward-looking investment decisions.

Infrastructure investment under uncertainty

Many volatile factors influence the performance of infrastructure and these yield a range of uncertainties when forward-looking investment decisions are being considered. This article is restricted to consideration of physical infrastructure, which has a wide spectrum of such factors. It includes physical events such as earthquakes that are beyond the influence of humankind, other events for each of which there is a very small probability of occurrence, and events that will almost certainly occur at some point within any reasonable period of time. It also includes economic events relating to uncommon financial episodes and common, but uncertain, volatility in demand and cost. Rare physical events have implications for investment in infrastructure that provides some mitigation of the effects of these events. In so doing, there is a trade-off between providing in advance for remotely likely but substantial events in specific, and usually costly, redundancy infrastructure, and having an economy with the resources to deal ex post with natural disasters. Obviously, some intermediate position will be socially desirable.

Particulars of US Information Technology and productivity: lessons for Europe

There is ample evidence that investment in Information Technology (IT) boosted labour markets productivity in the USA. In fact, conspicuous flows of investment in this sector enabled the US firms to record high rates of productivity growth and to boost up the country's economic growth to very high rates. The US experience that took place during the second part of the 1990s was not echoed in Europe owing to the fact that European firms have not adopted forward-looking investment decisions on this sector. Besides divergence in investment decisions, it is possible to observe that divergence in productive growth outcomes between the US and European firms have been as a result of different managerial organisations.

Information Technology and Information Society in Poland

Investment on the information technology has a prominent place in understanding the growth of labour markets productivity in the USA after 1995. While investment on information technology enabled US firms to achieve high growth rates of both labour and total factor productivity, neither Western European nor Central European firms echoed the US experience. The European productive system has failed to implement forward-looking investment decisions. This paper is designed to help readers make sense of the complexity of information technology and information society in Poland, and describes challenges to keep the Polish economy competitive in the 21st century.

On the effects of investment tax credits on economic efficiency and growth

This paper explores the overall efficiency effects of ITCs in the context of a disaggregated dynamic general equilibrium simulation model of the U.S. economy. This model postulates forward-looking investment decisions, and allows for optimal government borrowing and financial crowding out. Simulation results confirm the conventional wisdom that ITCs are distortionary, but challenge the equally conventional wisdom that ITCs necessarily spur investment and GDP. In addition, results point to an important policy trade-off. Introducing ITCs without neutralizing their budgetary effects would lead to low efficiency losses but would reduce investment and GDP due to financial crowding out. In turn, imposition of ITCs while blocking their budgetary effects would lead to relatively large efficiency losses while minimizing the negative impact on investment and GDP.

Tax policy, asset prices, and growth: A general equilibrium analysis

This paper presents a computable general equilibrium tax policy model that combines a consideration of disaggregate industry effects with an integrated treatment of short- and long-run adjustments to policy initiatives. The model's explicit consideration of forward-looking investment decisions and adjustment dynamics permits assessments of short-run effects of tax policy on asset values as well as long-term impacts on capital accumulation. Simulations reveal that effects on asset values and investment depend critically on whether policies are oriented toward new or old capital. Investment tax credits yield significant increases in investment without conferring windfall gains to corporate shareholders. Corporate tax cuts with the same revenue cost, on the other hand, yield large windfalls to shareholders while providing only a modest investment stimulus. Incidence and growth effects differ considerably across sectors, particularly between business and housing.