This paper investigates how firms manage their savings, financing, and investment when aggregate uncertainty is time-varying. I develop and estimate a dynamic model featuring aggregate uncertainty shocks, costly external financing, investment irreversibility, and time-varying risk premia. In my model, firms have a precautionary-savings motive and real options to wait, both of which interact wit...

This paper presents estimates of the e¤ects of uncertainty on both short run investment behaviour and long run capital accumulation for panels of African and Asian …rms. We estimate structural investment models in which the level of uncertainty in‡uences investment behaviour through di¤erent forms of adjustment costs: partial irreversibility, a …xed cost of undertaking any investment at all, an...

This paper studies the macroeconomic implications of …rms’precautionary real investment behavior in response to the anticipation of future …nancing constraints. Firms increase their demand for liquid and safe but low-return investments in anticipation of future borrowing constraints in order to decrease the probability of having to forego future pro…table investment opportunities. I show in a c...

This paper explores the role of public debt and fiscal deficits on factor productivity in an economy with credit market frictions and heterogeneous firms. When credit market conditions are sufficiently weak, low interest rates permit the government to run Ponzi schemes so that permanent primary deficits can be sustained. For small enough deficit ratios, the model has two steady states of which ...

We develop a dynamic principal–agent model to show how imperfect public information and asymmetric beliefs, asymmetric risk attitudes, complementary actions by both parties, and inter-temporal adverse selection arising from the agent’s unobservable actions interact to affect optimal dynamic contracts. Our continuous-time formulation of the model, which features both “hidden actions” and “hidden...

This paper conducts a theoretical and quantitative analysis of how entrepreneurs choose firm size, capital structure, default, and owner consumption to manage firm risk, including how these choices change with risk aversion. We decompose an entrepreneur’s default decision into three elements: the fraction of firm debt; the potential reduction in personal consumption from losing the firm; and th...

This paper investigates how firms dynamically adjust their use of capital, labor, energy, and materials using the Colombian Census of Manufacturing. This Census contains data at the establishment level and provides evidence of a mix of smooth and lumpy adjustments and of interrelated factor adjustments. Based on this evidence, I propose a dynamic firm model that incorporates five key features: ...

Two firms face market development uncertainty in a continuous-time investment model. They noncooperatively choose when to invest in a lumpy capacity before competing in the market stage. The combined impact on equilibrium outcomes of the firms’ relative ability to detect the new demand (or “alertness”, Kirzner (1973)) and of a persistent first-mover advantage is characterized. With perfect aler...

We introduce a post-entry liquidity constraint to the standard model of a …rm with serially correlated pro…tability and an irreversible exit decision. We assume that …rms with no cash holdings and negative cash ‡ow must either exit or raise new cash at a transaction cost. This creates a precautionary motive for holding cash, which must be traded o¤ against the liquidity cost of holding cash. We...