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Underinvestment or/and Overinvestment?

In: The Unbalanced Economy

Author

Listed:
  • Ciaran Driver

    (University of London)

  • Paul Temple

    (University of Surrey)

Abstract

In Chapter 4 we highlighted the potential for market failure in allocating fixed capital, one reason being the difficulty of investment decision-making under uncertainty. That argument in itself may not be enough to convince doubters of the case for a negative bias to capital investment. It may for example reasonably be claimed that the ‘animal spirits’ that replace conscious calculation may result as much in irrational exuberance and over-investment as in cautious inactivity. Arguments concerning spillover effects, while in our view powerful and persuasive, have also failed to fully convince because the emphasis in that literature tends to be on disembodied spillovers. A third argument relating to financial constraints has found more acceptance, but we have not emphasized it here because it is a complicated story that relates to the design of corporate governance as we discuss later in Chapter 6.

Suggested Citation

  • Ciaran Driver & Paul Temple, 2012. "Underinvestment or/and Overinvestment?," Palgrave Macmillan Books, in: The Unbalanced Economy, chapter 5, pages 87-106, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-27179-2_5
    DOI: 10.1057/9781137271792_5
    as

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