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Investment choices and production dynamics: The role of price expectations, financial deficit, and production constraints

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  • Ikonnikova, Svetlana A.
  • del Carpio Neyra, Victor
  • Berdysheva, Sofia

Abstract

We propose a model that helps answer two questions: (1) what motivates firms to invest in novel technologies, often characterized by low (or negative) returns, forgoing high-profitability projects, and (2) why responses to price changes of seemingly similar firms may differ substantially. The developed framework reveals how financial limitations, production capacity constraints, and expectations on intertemporal price differences and productivity improvements alter investment decisions and the elasticity of supply. Using the U.S. unconventional oil and gas investment and production data, we reveal the trade-off between profit generation and investment-driven improvements in productivity. Then, with simulations, we show how the price elasticity of supply may differ across firms with different financial and production capabilities and how learning abilities and price expectations explain the negative elasticity (or “backward-bending” supply curve) phenomenon.

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  • Ikonnikova, Svetlana A. & del Carpio Neyra, Victor & Berdysheva, Sofia, 2022. "Investment choices and production dynamics: The role of price expectations, financial deficit, and production constraints," Journal of Economics and Business, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:jebusi:v:120:y:2022:i:c:s0148619522000236
    DOI: 10.1016/j.jeconbus.2022.106067
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