Affiliation:
1. Central Bank of Chile (email: )
2. Toulouse School of Economics and CEPR (email: )
3. Yale University and NBER (email: )
Abstract
We analyze the consequences of noisy information aggregation for investment. Market imperfections create endogenous rents that cause overinvestment in upside risks and underinvestment in downside risks. In partial equilibrium, these inefficiencies are particularly severe if upside risks are coupled with easy scalability of investment. In general equilibrium, the shareholders’ collective attempts to boost value of individual firms leads to a novel externality operating through price that amplifies investment distortions with downside risks but offsets distortions with upside risks. (JEL D21, D25, D83, G14, G32, G41)
Publisher
American Economic Association
Subject
Economics and Econometrics
Reference40 articles.
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