Dean model
The Dean model is a total program for determining the optimal investment and financing program . This model was introduced by Joel Dean in 1951 .
Assumptions
Secure, independent investment objects are considered at two points in time. In addition, an imperfect capital market is assumed. It is assumed that the projects under consideration have a duration of one period. Furthermore, there is no uniform borrowing rate, which means that different interest rates can be assigned to the individual investment objects. The lending rates increase with the financing volume, which means that additional borrowing becomes more and more expensive. Furthermore, the investment income decreases with the investment volume, that is, a further investment brings ever lower interest rates. There are arbitrarily divisible investment objects and arbitrarily divisible financing objects. In addition, the Dean model assumes that there are no sales restrictions and that the necessary production factors are available in sufficient quantities.
application
The main goal of the Dean model is to maximize final wealth. The model is carried out in three steps. In the first step, priorities are assigned to the investment objects. The projects are sorted according to falling yields, thus obtaining the capital demand curve . In the second step, the same steps are carried out for the financing objects. However, the projects are now sorted according to increasing returns and you get the capital supply curve . The optimality is finally obtained from the intersection of the two curves. The endogenous marginal rate of return results from the intersection.
weaknesses
The borrowing rate is independent of the investment . Furthermore, there is no real justification for the different borrowing rates. The Dean model fails in the case of multiple periods, since a one-period project duration is assumed.