Investment reluctance: irreversibility or imperfect capital markets?

Abstract

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. Oxford University Press and Foundation for the European Review of Agricultural Economics 2010; all rights reserved. For permissions, please email [e-mail], Oxford University Press.