The Efficiency of Investment in the Presence of Aggregate Demand Spillovers

Andrei Shleifer and Robert Vishny

No 2297, NBER Working Papers from National Bureau of Economic Research, Inc

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 choices under uncertainty will not in general be socially optimal. Under reasonable conditions, private investment is too low.

Date: 1987-06
Note: ME
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Published as Andrei Shleifer and Robert W. Vishney. "The Efficiency of Investment in the Presence of Aggregate Demand Spillovers" Journal of Political Economy December 1988
Published as Journal of Political Economy, December 1988.

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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 (1988)
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