ABSTRACT
E. Fehr et al. incorporate prospect theory into a model of firm behaviour by focusing on long-term contracts; using a market experiment which separates responses to rigid versus flexible contracts and good versus bad states they find empirical support for O. Hart and T. Moore’s theory of the firm. One approach to incorporating insights from behavioural economics into the analysis of businesses’ investment and financing decisions is to incorporate key elements from behavioural economics directly into investment appraisal tools. Better models of investment decision-making, which explicitly incorporate departures from rational behaviour, are needed, so that governments can better understand how potential investors might respond to changes in public policy, and what the public sector can do to encourage desirable investment outcomes. A key issue for businesses is financing their investment decisions so to fund fixed asset investments that generate profits for the future.
