ABSTRACT
This chapter investigates some theoretical issues relevant to corporate investment decisions. Much of the theoretical literature on investment in labor-managed economies concerns a bias that may make workers reluctant to invest their own money in their firm. A more plausible assumption is that the earnings on non-owned assets are distributed to the workers each period and are deposited in their savings accounts where they are compounded over time at rate s. Regardless of whether inflation is a consequence of the Furubotn/ Pejovich bias, it brings people to an issue that has not been mentioned in the literature on Yugoslav investment decisions. In a labor-managed economy, virtually all individually owned financial assets are savings accounts, in which principal and interest are measured in nominal terms, i.e. are not adjusted for inflation. Unless inflation fully offsets the Furubotn/Pejovich bias, there will remain some bias against investment in the firm.
