The Efficiency of Investment in the Presence of Aggregate Demand Spillovers

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The Efficiency of Investment in the Presence of Aggregate Demand Spillovers

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Title: The Efficiency of Investment in the Presence of Aggregate Demand Spillovers
Author: Shleifer, Andrei; Vishny, Robert W.

Note: Order does not necessarily reflect citation order of authors.

Citation: Shleifer, Andrei and Robert W. Vishny. 1988. The efficiency of investment in the presence of aggregate demand spillovers. Journal of Political Economy 96(6): 1221-1231.
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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 aggregate 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, investment is too low.
Published Version: http://www.jstor.org/stable/1831949
Other Sources: http://www.nber.org/papers/w2297.pdf
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:3725553
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