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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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Handle: RePEc:nbr:nberwo:2297

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Cited by:
  1. Murphy, Kevin M. & Shleifer, Andrei & Vishny, Robert W., 1989. "Industrialization and the Big Push," Scholarly Articles 3606235, Harvard University Department of Economics.
  2. Marco Da Rin & Thomas Hellmann, 2000. "Banks as Catalysts for Industrialisation," FMG Discussion Papers dp343, Financial Markets Group.
  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. Amedeo Panci, 1999. "Multiple equilibria: coordination failure and endogenous cycle," Working Papers 30, University of Rome La Sapienza, Department of Public Economics.
  5. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Income Distribution, Market Size, and Industrialization," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 537-64, August.
  6. 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.
  7. Elmendorf, Douglas W & Kimball, Miles S, 2000. "Taxation of Labor Income and the Demand for Risky Assets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 801-33, August.
  8. 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.
  9. 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.
  10. 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.
  11. Bougheas, Spiros, 2002. "Optimism, education and industrial development," Research in Economics, Elsevier, vol. 56(2), pages 199-214, June.

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