The AI investment race

Phurichai Rungcharoenkitkul

No 1367, BIS Working Papers from Bank for International Settlements

Abstract: The AI build-out ranks among the largest technology-driven investment booms in US history. Its scale, reliance on debt and circular equity ties raise questions about the boom's sustainability and financial stability. We study a dynamic contest in which firms competing for a few dominant positions over-commit resources. The over-investment leaves the sector exposed to revenue disappointment that could turn boom into bust. The larger the boom, the deeper the eventual bust. The race to commit early through debt and circular financing also makes a bust more likely. Calibrated to balance sheet and deal data, the model points to over-investment of around 1.5 times the efficient level, rising to around three times where demand is less elastic. A network analysis shows that stress in one firm could cascade to others through chains of financial exposures.

Keywords: artificial intelligence; investment; contest theory; circular financing; boom-bust cycle; financial fragility; network (search for similar items in EconPapers)
JEL-codes: G01 G32 L13 O33 (search for similar items in EconPapers)
Date: 2026-07
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