Investment, R&D and credit constraints

This thesis develops a dynamic industry equilibrium framework to be employed in situations where firms compete in a complex environment with either several firms in the industry or large state spaces. This model is employed to analyze the problems of Investment, R and D and Credit Constraints in situations where the 'curse of dimensionality' occurs. Chapter 1 introduces the problem and applications. Chapter 2 describes the model, assumptions and main results. Chapter 3 considers the problem of estimating production functions in a manner which is consistent with the model. Chapter 4 contains an application to estimate the Sunk Costs of R and D in the Portuguese Moulds Industry and estimate them to be about 2.6 million euros (1.7 times the average firm sales level). Finally Chapter 5 incorporates an application to the US Steel Industry to estimate the costs of external finance. We find that the average sunk cost of R and D for this industry is on the order of {dollar}194m and the costs of external finance are about 35 cents per dollar raised. In the second application (in joint work with John Van Reenen), we use a similar framework and introduce financial constraints which can affect investment and R and D decisions. By specifying a dynamic structural model and solving through numerical simulation we model adjustment costs, R and D decisions and financial constraints simultaneously. Applying the model to 35 years of firm-level panel data from the US iron and steel industry we provide evidence that costs of external finance are substantial, consistent with asymmetric information, even in a developed financial market like the US. The average sunk cost of R and D is on the order of {dollar}194m - consistent with industry estimates of the typical costs of building an R&D lab.