J. P. Caulkins, G. Feichtinger, D. Grass, R.F. Hartl, P.M. Kort, A. Seidl:
"Capital stock management during a recession that freezes credit markets";
Journal of Economic Behavior & Organization,
This paper considers the problem of how to price a conspicuous product while maintainingliquidity during a recession which both reduces demand and freezes credit markets. Reduc-ing price would help maintain cash flow, but low prices can erode brand image and, hence,long-term sales. The paper extends earlier work of the same authors by explicitly derivinga firm´s optimal cash management behavior, taking into account that a too low cash levelresults in bankruptcy.There are different sets of initial conditions for which qualitatively different solutiontrajectories are optimal. We distinguish mild and severe recessions. With mild recessionsbankruptcy can be avoided for sure when the brand image is large enough. In case therecession is of intermediate strength, it can be optimal to throttle forward then back howaggressively one spends down cash reserves, with the associated state constraint alternatelybeing non-binding, binding, non-binding, then binding in such a way that the firm ceasesoperation.
Conspicuous consumption,Optimal control,Recession,Bankruptcy
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