The Complex Dynamics of Financially Constrained Heterogeneous Firms

We model production and investment behaviour of financially constrained firms in an uncertain environment with capital market imperfections. Each firm is characterized by a degree of financial fragility, inversely related to the ratio of the equity base to the capital stock, the equity ratio for short, that affects supply and capital accumulation decisions. In this framework we explore the evolution over time of the first and second moments of the distribution. For particular configurations of parameters the dynamic patterns of the average equity ratio and the variance can be irregular and asymmetric. In this setting we assess the effectiveness of two methods of controlling chaos.