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Risk-taking, Rent-seeking and Investment when Financial Markets are Noisy

Author

Listed:
  • Christian Hellwig

    (Toulouse School of Economics)

  • Aleh Tsyvinski

    (Yale University)

  • Elias Albagli

    (Central Bank of Chile)

Abstract

Abstract We analyze investment and risk-taking by firms and identify a new distortion due to market imperfections and shareholder incentives. First we show that noisy information aggregation introduces a rent-shifting motive and leads to inefficient investment. These inefficiencies are particularly severe if upside risks are coupled with near constant returns to scale. We consider four applications of our model that give rise to excess leverage, negative welfare effects of transparency, excess sensitivity of investment to stock prices, and dynamically inconsistent firm behavior. Our third contribution is to evaluate various welfare improving policy interventions.

Suggested Citation

  • Christian Hellwig & Aleh Tsyvinski & Elias Albagli, 2017. "Risk-taking, Rent-seeking and Investment when Financial Markets are Noisy," 2017 Meeting Papers 1170, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:1170
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    References listed on IDEAS

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