Inefficient Investment Waves
We develop a dynamic model of trading and investment with limited aggregate resources to study investment cycles. Unverifiable idiosyncratic investment opportunities imply market prices to play a role of rent distribution, distorting private investment incentives from a social point of view. This distortion is price-dependent, leading to two-sided inefficient investment cycles--too much investment in booms with high prices and too little in recessions with low prices. Interventions targeting only the underinvestment in recessions might make all agents worse off. We connect our results to both industry specific and aggregate boom-and-bust patterns.
We are grateful to Ulf Axelson, Arvind Krishnamurthy, Guido Lorenzoni, Semyon Malamud, John Moore, Martin Oehmke, Alp Simsek, Balazs Szentes, Jaume Ventura, Rob Vishny, and numerous seminar participants. Péter Kondor acknowledges the financial support of the Paul Woolley Centre at the LSE. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Zhiguo He & Péter Kondor, 2016. "Inefficient Investment Waves," Econometrica, Econometric Society, vol. 84, pages 735-780, 03. citation courtesy of