Investment and the Aggregation of Risks

Jayasri Dutta () and Herakles Polemarchakis ()

Discussion Paper Serie A from University of Bonn, Germany

Abstract: A competitive equilibrium may preserve, even magnify, firm-specific risks in the aggregate. This is the case if firms can anticipate their productivites when they make investment decisions or, alternatively, if capital can be reallocated once the productivites of firms are realized. In a large economy, output is serially correlated and the real rate of interest varies countercyclically. On the contrary, in a large economy without anticipation or shiftable investment, a competitive equilibrium is essentially riskless.

Date: 1990-03
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