Differential Information, Monopolistic Competition, and Investment

Kiyohiko G Nishimura

International Economic Review, 1991, vol. 32, issue 4, 809-21

Abstract: The behavior of investment in a monopolistically competitive industry is investigated under the assumption of imperfect information about the average investment. Firms' profits are affected by productivity shocks. These shocks consist of two types of disturbances, industry-wide and idiosyncratic ones. The main results are investment under imperfect information is more volatile than that under perfect information if firms can observe their own productivity conditions (but not their components) and increased competition always destabilizes investment and raises its volatility. The "rigidity" of rational expectations plays a crucial role. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1991
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