Edited by Dimitri B. Papadimitriou
Chapter 6: The Survival of Firms
6. The survival of ﬁrms The apparatus that we have constructed, a family of average cost curves for each plant and of planning curves for each production function, can be modiﬁed to take into account the survival conditions for a ﬁrm. Survival conditions are an eﬀective constraint upon the behavior of ﬁrms. Therefore these modiﬁed cost curves can be related to investment decisions. Survival conditions have been deﬁned as requiring that total money expenses be less than or equal to total money receipts (ignoring whatever initial liquidity the ﬁrm possesses) for every time period from the initial position to the ﬁrm’s horizon. The objective phenomenon related to the survival of a ﬁrm is its balance sheet structure. What we will do is construct cost curves which take into account the eﬀects of the balance sheet structure of a ﬁrm upon its survival conditions. We will ﬁrst operate upon the cost curves to allow for the objective costs associated with a balance sheet structure. We will then allow for the risk associated by the ﬁrm with diﬀerent balance sheet structures. These modiﬁed cost curves enable us to investigate how balance sheet structures and changes in ﬁnancial markets aﬀect ﬁrm’s investment behavior. The debts of a ﬁrm reﬂect the conditions which existed in the relevant ﬁnancial markets at the date when the debts were assumed. The survival conditions therefore are measures of the eﬀects that ﬁnancial or money market conditions have upon...
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