Economic Theory and Computational Economics

Herbert Dawid, Roberto Ippoliti, Xingang Wen

A firm is financially constrained if there exists a wedge between the costs of using internal and external funds, or in a more abstract sense, if the firm is unable to raise enough funds to finance its optimal path of growth. A growing body of literature in economics and finance has investigated the impact of financial constraints on firm’s performances and behaviors, but existing literature mainly takes an empirical perspective.

 

The contribution of ETACE to this research area is to combine theoretical and empirical method, and to study the impact of financial constraints on firm’s dynamic R&D investment decisions, bankruptcy risk and corporate governance. On the one hand,  we investigate how the limited access to external financial resources can increase firm’s bankruptcy risk since it might fail to meet its financial obligations; while, on the other hand, we analyze how the financial constraints can push the same firm to search alternative funding strategies (e.g., trade credits) to support optimal R&D strategies. Our research covers the strategic interactions among market players such as firms and their creditors, and employs game theory, dynamic programming optimization, and real options methods, as well as empirical models to validate the collected results. Research in this area is partly related to project C2 in the collaborative research center SFB1283