Inefficient Investment Waves

74 Pages Posted: 15 Jul 2012 Last revised: 12 Apr 2023

See all articles by Zhiguo He

Zhiguo He

Stanford University - Knight Management Center

Peter Kondor

London School of Economics & Political Science (LSE); Central European University (CEU)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2012

Abstract

We develop a dynamic model of trading and investment with limited aggregate resources to study investment cycles. Unverifiable idiosyncratic investment opportunities imply market prices to play a role of rent distribution, distorting private investment incentives from a social point of view. This distortion is price-dependent, leading to two-sided inefficient investment cycles--too much investment in booms with high prices and too little in recessions with low prices. Interventions targeting only the underinvestment in recessions might make all agents worse off. We connect our results to both industry specific and aggregate boom-and-bust patterns.

Suggested Citation

He, Zhiguo and Kondor, Peter and Kondor, Peter, Inefficient Investment Waves (July 2012). NBER Working Paper No. w18217, Available at SSRN: https://ssrn.com/abstract=2107530

Zhiguo He (Contact Author)

Stanford University - Knight Management Center ( email )

655 Knight Way
Stanford, CA 94305-7298
United States

Peter Kondor

Central European University (CEU) ( email )

Nador utca 9
Budapest, H-1051
Hungary

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://fmg.lse.ac.uk/~kondor

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