The Efficiency of Investment in the Presence of Aggregate Demand Spillovers
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.
|Date of creation:||Jun 1987|
|Date of revision:|
|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|
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