An Alternative Estimation Framework for Firm-Level Capital Investment

Our understanding of the effect of investment-financing constraints in transition economies faces significant problems, both in terms of choice of the underlying theoretical model of investment behaviour and in the estimation framework adopted. These problems drive the choice in this paper of implementing a double hurdle estimation routine based on the Abel and Eberly (1998) investment model. We find evidence that a model incorporating intermittent adjustment of capital stock and using rates of capacity utilisation captures different effects compared to a standard accelerator model. Application of this methodology to sample of firms from Romania and Spain suggests that firms in Romania may be more financially constrained than previously estimated.