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The Efficiency of Investment in the Presence of Aggregate Demand Spillovers

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  • Andrei Shleifer
  • Robert W. Vishny

Abstract

In the presence of aggregate demand spillovers, an imperfectly competitive firm's profit is positively related to aggregate income, which in turn rises with profits of all firms in the economy. This pecuniary externality makes a dollar of a firm's profit raise aggregate income by more than a dollar, since other firms' profits also rise, and in this way gives rise to a "multiplier." Since such "multipliers" are ignored by firms making investment decisions, privately optimal investment choices under uncertainty will not in general be socially optimal. Under reasonable conditions, private investment is too low.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2297.

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Date of creation: Jun 1987
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Publication status: published as Andrei Shleifer and Robert W. Vishney. "The Efficiency of Investment in the Presence of Aggregate Demand Spillovers" Journal of Political Economy December 1988
Handle: RePEc:nbr:nberwo:2297

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  1. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-90, December.
  2. Olivier J. Blanchard & Nobuhiro Kiyotaki, 1985. "Monopolistic Competition, Aggregate Demand Externalities and Real Effects of Nominal Money," NBER Working Papers 1770, National Bureau of Economic Research, Inc.
  3. Hart, Oliver, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 109-38, February.
  4. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Weitzman, Martin L, 1982. "Increasing Returns and the Foundations of Unemployment Theory," Economic Journal, Royal Economic Society, vol. 92(368), pages 787-804, December.
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Cited by:
  1. Da Rin, Marco & Hellmann, Thomas F., 2002. "Banks as Catalysts for Industrialization," Research Papers 1398, Stanford University, Graduate School of Business.
  2. Douglas W. Elmendorf & Miles S. Kimball, 1991. "Taxation of Labor Income and the Demand For Risky Assets," NBER Working Papers 3904, National Bureau of Economic Research, Inc.
  3. Marco Da Rin & Thomas Hellmann, . "Banks as Catalysts of the Big Push," Working Papers 98, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Bougheas, Spiros, 2002. "Optimism, education and industrial development," Research in Economics, Elsevier, vol. 56(2), pages 199-214, June.
  5. Yew-Kwang Ng & Ying Wu, 2004. "Multiple Equilibria and Interfirm Macro-Externality: An Analysis of Sluggish Real Adjustment," Annals of Economics and Finance, Society for AEF, vol. 5(1), pages 61-77, May.
  6. Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1988. "Income Distribution, Market Size, and Industrialization," NBER Working Papers 2709, National Bureau of Economic Research, Inc.
  7. Murphy, Kevin M. & Shleifer, Andrei & Vishny, Robert W., 1989. "Industrialization and the Big Push," Scholarly Articles 3606235, Harvard University Department of Economics.
  8. Krug, B. & Hendrischke, H., 2006. "Institution Building and Change in China," ERIM Report Series Research in Management ERS-2006-008-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  9. David Kelsey & Wei Pang, 2010. "How productive is optimism? the Impact of ambiguity on the "big push"," Economics Bulletin, AccessEcon, vol. 30(1), pages 855-865.
  10. Amedeo Panci, 1999. "Multiple equilibria: coordination failure and endogenous cycle," Working Papers 30, University of Rome La Sapienza, Department of Public Economics.
  11. Toshihiro Matsumura & Masako Ueda, 1996. "Endogenous timing in the switching of technology with Marshallian externalities," Journal of Economics, Springer, vol. 63(1), pages 41-56, February.

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