Imperfect Financial Markets and Investment Inefficiencies
Elias Albagli, Christian Hellwig, Aleh Tsyvinski
American Economic Review · 2023 · Volume 113 · Issue 9
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.
Keywords
Firm Behavior: Theory, Intertemporal Firm Choice: Investment, Capacity, and Financing, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Information and Market Efficiency, Event Studies, Insider Trading, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill, Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]
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