Imperfect Financial Markets and Investment Inefficiencies

Elias Albagli, Christian Hellwig and Aleh Tsyvinski

No 18-891, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We analyze the consequences of noisy information aggregation for investment. Market imperfections create endogenous rents that cause overinvestment in up-side risks and underinvestment in downside risks. In partial equilibrium, these inefficiencies are particularly severe if upside risks are coupled with easy scalabil-ity 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 dis-tortions with upside risks.

Date: 2018-02, Revised 2023-02
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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 (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:32475

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