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The Efficiency of Investment in the Presence of Aggregate Demand Spillovers

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  • Shleifer, Andrei
  • Vishny, Robert W

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 aggrega te 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 decisions under uncertainty will not, in general, be socially optimal. Under reasonable conditions, investmen t is too low. Copyright 1988 by University of Chicago Press.

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  • Shleifer, Andrei & Vishny, Robert W, 1988. "The Efficiency of Investment in the Presence of Aggregate Demand Spillovers," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1221-1231, December.
    • Handle: RePEc:ucp:jpolec:v:96:y:1988:i:6:p:1221-31
    DOI: 10.1086/261585
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    Cited by:

    1. Bouvard, Matthieu & de Motta, Adolfo, 2021. "Labor leverage, coordination failures, and aggregate risk," TSE Working Papers 21-1179, Toulouse School of Economics (TSE).
    2. 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.
    3. Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1989. "Income Distribution, Market Size, and Industrialization," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(3), pages 537-564.
    4. Berg, Tobias & Reisinger, Markus & Streitz, Daniel, 2021. "Spillover effects in empirical corporate finance," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1109-1127.
    5. Matthew Rognlie & Andrei Shleifer & Alp Simsek, 2018. "Investment Hangover and the Great Recession," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(2), pages 113-153, April.
    6. Da Rin, Marco & Hellmann, Thomas, 2002. "Banks as Catalysts for Industrialization," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 366-397, October.
    7. 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.
    8. 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.
    9. 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.
    10. Bouvard, Matthieu & de Motta, Adolfo, 2021. "Labor leverage, coordination failures, and aggregate risk," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1229-1252.
    11. Pierre-Yves Hénin, 1994. "L'impact à long terme des chocs de demande," Revue Économique, Programme National Persée, vol. 45(3), pages 883-896.
    12. Matthieu Bouvard & Adolfo de Motta, 2021. "Labor leverage, coordination failures, and aggregate risk," Post-Print hal-03524121, HAL.
    13. 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.
    14. Patrick Artus, 1993. "Défauts de coordination des activités. Principes et exemples," Revue Économique, Programme National Persée, vol. 44(3), pages 551-568.
    15. Bougheas, Spiros, 2002. "Optimism, education and industrial development," Research in Economics, Elsevier, vol. 56(2), pages 199-214, June.
    16. 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.
    17. Praveen K. Kopalle & Donald R. Lehmann, 2006. "Setting Quality Expectations When Entering a Market: What Should the Promise Be?," Marketing Science, INFORMS, vol. 25(1), pages 8-24, 01-02.
    18. Kopalle, Praveen K. & Krishna, Aradhna & Rajan, Uday & Wang, Yu, 2022. "How does regulatory monitoring of cause marketing affect firm behavior and donations to charity?," International Journal of Research in Marketing, Elsevier, vol. 39(3), pages 947-966.
    19. 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.
    20. Amedeo Panci, 1999. "Multiple equilibria: coordination failure and endogenous cycle," Working Papers in Public Economics 30, University of Rome La Sapienza, Department of Economics and Law.

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