Irreversible Investment and Strategic Interaction

Antonio Fatas and Andrew Metrick

Economica, 1997, vol. 64, issue 253, 31-47

Abstract: This paper introduces an aggregate demand externality into a model of irreversible investment. The central result of the paper establishes the mechanism in which increases in uncertainty can lead to suboptimal recessions. These inefficient outcomes occur even if agents are allowed to coordinate to the best possible equilibria. The result is driven by the external effects of firms’ investment decisions.

Date: 1997
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