A Model of Investment Behavior of Enterprise Owner in an Imperfect Capital Market

Abstract

This paper presents a framework for the study of how the profitability of business environment impacts the investment behavior of the enterprise owner in the case of imperfect capital market with essentially higher interest rates for borrowing than for saving. This question is important for the resumption of economic growth in Russia. The profitability of business environment in an imperfect market can be valued in terms of Cantor–Lippman approach. In this paper we propose an infinite-horizon optimal control problem that represents the investment behavior of an enterprise owner. In terms of our framework the market imperfection is modeled via phase restriction on the cash of the owner. That makes difficulties with studying the optimal control in the model. We construct the solution via analysis of the finite-horizon problem and apparatus of viscosity solutions of the Hamilton–Jacobi–Bellman equation. We show that the type of investment behavior depends on the ratio of profitability indicator of business environment to owner’s discount rate.