TRANSACTION COSTS, FARM FINANCE AND INVESTMENT

An investment model of the farm firm is constructed which allows for a djustment costs in investment and transactions costs associated with n ew borrowing. The presence of transaction costs means that the financi al and investment decisions of the farm are simultaneous, and hence th at financial decisions affect investment. In contrast to the work on l iquidity constraints, the structure of the model generates a classific ation of firms which is observable in the data. This model is compared with a model that assumes perfect capital markets. Both models are es timated and tested using a balanced panel of 3650 French farms over th e period 1989-1993. The specification based on the perfect capital mar ket assumption is rejected. The sample selection criterion implied by the transaction costs model allows the estimation of an empirically ac ceptable Euler equation for investment.