Costly contingent contracts (original) (raw)

We develop novel methods for establishing coherency conditions in Static and Dynamic Limited Dependent Variables (LDV) Models. We propose estimation strategies based on Conditional Maximum Likelihood Estimation for simultaneous LDV models without imposing recursivity. Monte-Carlo experiments con…rm substantive Mean-Squared-Error improvements of our approach over other estimators. We analyse the impact of …nancing constraints on innovation: ceteris paribus, a …rm facing binding …nance constraints is substantially less likely to undertake innovation, while the probability that a …rm encounters a binding …nance constraint more than doubles if the …rm is innovative. A strong role for state dependence in dynamic versions of our models is also established.