Imperfect Financial Markets and Investment Inefficiencies

Elias Albagli, Christian Hellwig and Aleh Tsyvinski
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Elias Albagli: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Aleh Tsyvinski: Yale University [New Haven]

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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: 2023
New Economics Papers: this item is included in nep-cfn, nep-fdg and nep-fmk
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Published in American Economic Review, 2023, 113 (9), pp.2323-2354. ⟨10.1257/aer.20170725⟩

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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:hal:journl:hal-04210328

DOI: 10.1257/aer.20170725

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