Imperfect Financial Markets and Investment Inefficiencies

Christian Hellwig, Elias Albagli and Aleh Tsyvinski

No 12045, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Date: 2017-05
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Related works:
Journal Article: Imperfect Financial Markets and Investment Inefficiencies (2023)
Working Paper: Imperfect Financial Markets and Investment Inefficiencies (2023)
Working Paper: Imperfect Financial Markets and Investment Inefficiencies (2023)
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