Inefficient Investment Waves [report]

Zhiguo He, Péter Kondor
2012 unpublished
We propose a dynamic model of investment and trade in a market of a specialized technology subject to two main frictions. First, agents cannot raise outside capital. Second, a random group of agents will have the opportunity to invest in new technology and there is no market to insure against this shock. The ...rst friction implies the presence of invesment cycles with abundant invesment and low returns in booms and little invesment and high returns in recessions. Only when the second friction
more » ... he second friction is present invesment cycles are constrained ine¢ cient. Often the ine¢ ciency is two-sided with too much invesment in booms and too little in recessions from a social point of view. Interventions targetting only the underinvesment in recessions might make all agents worse o¤. Also, the two-sided ine¢ ciency typically implies too volatile prices and too frequent realizations of abnormally low prices compared to fundamentals. Preliminary and Reference Incomplete. Email address: zhiguo.he@chicagobooth.edu, kondorp@ceu.hu. We are grateful to Arvind Krishnamurthy, Guido Lorenzoni, Rob Vishny, Luigi Zingales, and numerous seminar participants.
doi:10.3386/w18217 fatcat:hthax3htmfbyfjwsrrkzhebyqy