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Imperfect Financial Markets and Investment Inefficiencies

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  • Hellwig, Christian
  • Albagli, Elias
  • Tsyvinski, Aleh

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.

Suggested Citation

  • Hellwig, Christian & Albagli, Elias & Tsyvinski, Aleh, 2017. "Imperfect Financial Markets and Investment Inefficiencies," CEPR Discussion Papers 12045, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12045
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    Cited by:

    1. Arnold, Lutz G. & Zelzner, Sebastian, 2022. "Financial trading versus entrepreneurship: Competition for talent and negative feedback effects," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 186-199.
    2. Caio Machado & Ana Elisa Pereira, 2020. "Competing for Stock Market Feedback," Documentos de Trabajo 545, Instituto de Economia. Pontificia Universidad Católica de Chile..
    3. Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2021. "Dispersed Information and Asset Prices," Working Papers hal-03118639, HAL.
    4. Eduardo Dávila & Cecilia Parlatore, 2021. "Trading Costs and Informational Efficiency," Journal of Finance, American Finance Association, vol. 76(3), pages 1471-1539, June.
    5. Dávila, Eduardo & Parlatore, Cecilia, 2023. "Volatility and informativeness," Journal of Financial Economics, Elsevier, vol. 147(3), pages 550-572.
    6. Albagli, Elias & Hellwig, Christian & Tsyvinski, Aleh, 2021. "Information Aggregation with Asymmetric Asset Payoffs," TSE Working Papers 21-1172, Toulouse School of Economics (TSE), revised Apr 2023.
    7. Zhenyu Gao & Michael Sockin & Wei Xiong, 2020. "Learning about the Neighborhood," NBER Working Papers 26907, National Bureau of Economic Research, Inc.
    8. Lutz G. Arnold & Sebastian Zelzner, 2020. "Welfare Effects of the Allocation of Talent to Financial Trading: What Does the Grossman-Stiglitz Model Say?," Working Papers 190, Bavarian Graduate Program in Economics (BGPE).

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G1 - Financial Economics - - General Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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