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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.

Suggested Citation

  • Andrei Shleifer & Robert W. Vishny, 1987. "The Efficiency of Investment in the Presence of Aggregate Demand Spillovers," NBER Working Papers 2297, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2297
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    References listed on IDEAS

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    1. Weitzman, Martin L, 1982. "Increasing Returns and the Foundations of Unemployment Theory," Economic Journal, Royal Economic Society, vol. 92(368), pages 787-804, December.
    2. Oliver Hart, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, Oxford University Press, vol. 97(1), pages 109-138.
    3. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    4. 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.
    5. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-1190, December.
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    Cited by:

    1. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Industrialization and the Big Push," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1003-1026, October.
    2. Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1989. "Income Distribution, Market Size, and Industrialization," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 537-564.
    3. Da Rin, Marco & Hellmann, Thomas, 2002. "Banks as Catalysts for Industrialization," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 366-397, October.
    4. Marco Da Rin & Thomas Hellmann, "undated". "Banks as Catalysts of the Big Push," Working Papers 98, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    5. 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 801-833, August.
    6. 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.
    7. Pierre-Yves Hénin, 1994. "L'impact à long terme des chocs de demande," Revue Économique, Programme National Persée, vol. 45(3), pages 883-896.
    8. 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.
    9. Patrick Artus, 1993. "Défauts de coordination des activités. Principes et exemples," Revue Économique, Programme National Persée, vol. 44(3), pages 551-568.
    10. Bougheas, Spiros, 2002. "Optimism, education and industrial development," Research in Economics, Elsevier, vol. 56(2), pages 199-214, June.
    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.
    12. 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 University Rotterdam.
    13. Amedeo Panci, 1999. "Multiple equilibria: coordination failure and endogenous cycle," Working Papers 30, University of Rome La Sapienza, Department of Public Economics.

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