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Irreversible Investment and Strategic Interaction

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  • Fatas, Antonio
  • Metrick, Andrew

Abstract

This paper introduces an aggregate demand externality into a model of irreversible investment. The central result of the paper establishes the mechanism in which increases in uncertainty can lead to suboptimal recessions. These inefficient outcomes occur even if agents are allowed to coordinate to the best possible equilibria. The result is driven by the external effects of firms' investment decisions. Copyright 1997 by The London School of Economics and Political Science

Suggested Citation

  • Fatas, Antonio & Metrick, Andrew, 1997. "Irreversible Investment and Strategic Interaction," Economica, London School of Economics and Political Science, vol. 64(253), pages 31-47, February.
  • Handle: RePEc:bla:econom:v:64:y:1997:i:253:p:31-47
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    Cited by:

    1. Vercammen, James, 2000. "Irreversible investment under uncertainty and the threat of bankruptcy," Economics Letters, Elsevier, vol. 66(3), pages 319-325, March.
    2. 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.
    3. Kelsey, David & Pang, Wei, 2009. "How Productive is Optimism? A Simple Keynes-type "Big Push" Model," Economics Discussion Papers 2009-2, School of Economics, Kingston University London.

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