Economics, Econometrics and Finance
4 years ago

Policy interventions distort capital structure, hindering industry dynamics and innovation.

Computing in Economics and Finance
An agent based approach to analysis of Capital structure and industry dynamics: The role of policy
Roberto Gabriele, Enrico Zaninotto

Paper Summary

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The article explores how a firm's capital structure affects industry dynamics. Policy interventions can change the cost of capital, leading to firms being overcapitalized with low productivity. This can hinder competition and innovation in the market. Using an agent-based model, the researchers found that firms with different capital investments can lead to increased heterogeneity and hinder technical progress. By financing long-life investments, policies can lower the average cost of capital and influence firms' strategic decisions. The study shows how these factors can impact the overall industry dynamics.