Empirical verification of the investment theories will now proceed with a more detailed analysis of the role of certain market variables which are regarded as crucial by Furubotn and Pejovich, and of socialist features of the economy emphasized by Kornai, in determining investment in Yugoslavia.

The role of market variables

Furubotn and Pejovich's theory analyses an LMF under the Yugoslav institutional setting (social property, the capital maintenance requirement), while at the same time implicitly assuming that Yugoslavia is a market economy. Under such an assumption, investment in savings deposits and in firms' capital stock is expected to depend primarily on the interest rate, the lending rate, the marginal productivity of capital, and the time horizon of the representative worker (Furubotn and Pejovich 1973, p. 281).

In order to determine the role of these variables in Yugoslavia, they are presented (or approximated) for the 1966–85 period in table 6A.I in the appendix to this chapter. Since interest rates applied by banks have varied from a lower to an upper bound, the maximum nominal interest rates in a given year are reported. Because of rising inflation, interest rates have been deflated so as to obtain returns on savings deposits and the cost of borrowed funds in real terms. Capital returns are presented through three sets of figures: (1) the pre-tax profit rate, as a rough approximation of the marginal productivity of capital; (2) the post-tax profit rate, which has the advantage of excluding taxes, contributions, and other obligations (such as interest payments); and (3) realized returns on 100 dinars of utilized assets, as the official indicator of the Federal Accounting Office (SDK).