Imperfect Financial Markets and Investment Inefficiencies

Elias Albagli, Christian Hellwig and Aleh Tsyvinski

American Economic Review, 2023, vol. 113, issue 9, 2323-54

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-codes: D21 D25 D83 G14 G32 G41 (search for similar items in EconPapers)
Date: 2023
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Related works:
Working Paper: Imperfect Financial Markets and Investment Inefficiencies (2023)
Working Paper: Imperfect Financial Markets and Investment Inefficiencies (2023)
Working Paper: Imperfect Financial Markets and Investment Inefficiencies (2017)
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DOI: 10.1257/aer.20170725

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