Optimal intertemporal decisions in imperfect capital markets

Abstract

Optimal intertemporal investment solution paths are derived for both, firms operating in perfect financial markets and those facing credit constraints, due to imperfect capital markets. However, as in these markets, saving and investment decision may not be separable, we obtain the optimal dynamic path of these decisions for agents that own capital but do not have any access to credit and extend the analysis when these agents have some access to credit but yet face credit constraints from financial intermediaries. We next consider agents without physical capital and who derived their income from wages and/or financial assets. We study their optimal intertemporal decisions, among, consumption, financial assets and durable goods, first under perfect capital markets and then when credit constraints are present. The above results may be useful for both, the comparative dynamic analysis of agents with different type of endowments and immersed in imperfect financial markets and also to derive, from micro foundations, the aggregate demand and supply functions of intertemporal macro models for developing economies. The distinction between different types of agents according to their endowment may also help to assess the wealth and income distribution implications of economic policy.