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  3. American Economic Review
  4. September 2023
  5. Imperfect Financial Markets and Investment Inefficiencies

Imperfect Financial Markets and Investment Inefficiencies

  • Elias Albagli
  • Christian Hellwig
  • Aleh Tsyvinski
American Economic Review
vol. 113, no. 9, September 2023
(pp. 2323-54)
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Abstract

We analyze the consequences of noisy information aggregation for investment. Market imperfections create endogenous rents that cause overinvestment in upside risks and underinvestment in downside risks. In partial equilibrium, these inefficiencies are particularly severe if upside risks are coupled with easy scalability of investment. In general equilibrium, the shareholders' collective attempts to boost value of individual firms leads to a novel externality operating through price that amplifies investment distortions with downside risks but offsets distortions with upside risks.

Citation

Albagli, Elias, Christian Hellwig, and Aleh Tsyvinski. 2023. "Imperfect Financial Markets and Investment Inefficiencies." American Economic Review, 113 (9): 2323-54. DOI: 10.1257/aer.20170725

Additional Materials

JEL Classification

  • D21 Firm Behavior: Theory
  • D25 Intertemporal Firm Choice: Investment, Capacity, and Financing
  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • G14 Information and Market Efficiency; Event Studies; Insider Trading
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]