The Efficiency of Investment in the Presence of Aggregate Demand Spillovers

Andrei Shleifer and Robert W. Vishny

Scholarly Articles from Harvard University Department of Economics

Abstract: In the presence of aggregate demand spillovers, an imperfectly competitive firm's profit is positively related to aggregate income, which in turn rises with profits of all firms in the economy. This pecuniary externality makes a dollar of a firm's profit raise aggregate income by more than a dollar since other firms' profits also rise, and in this way gives rise to a "multiplier." Since such multipliers are ignored by firms making investment decisions, privately optimal investment decisions under uncertainty will not in general be socially optimal. Under reasonable conditions, investment is too low.

Date: 1988
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Published in Journal of Political Economy -Chicago-

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Related works:
Journal Article: The Efficiency of Investment in the Presence of Aggregate Demand Spillovers (1988)
Working Paper: The Efficiency of Investment in the Presence of Aggregate Demand Spillovers (1987)
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