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No news can be good news: irreversible investment and strategic interaction

Author: Fatás, Antonio ; Metrick, A.INSEAD Area: Economics and Political Science Series: Working Paper ; 95/68/EPS Publisher: Fontainebleau : INSEAD, 1995.Language: EnglishDescription: 25 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper introduces an aggregate demand externality into a model of irreversible investment. The central result of the paper establishes the mechanism in which increases in uncertainty can lead to sub-optimal recessions. These inefficient outcomes occur even if agents are allowed to coordinate to the best possible equilibria. The result is driven by the external effects of firms' investment decisions. The "no news can be good news" section draws an analogy between increases in uncertainty and improvements in the quality of information, with the conclusion that an improvement in information may also lead to a suboptimal recession
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This paper introduces an aggregate demand externality into a model of irreversible investment. The central result of the paper establishes the mechanism in which increases in uncertainty can lead to sub-optimal recessions. These inefficient outcomes occur even if agents are allowed to coordinate to the best possible equilibria. The result is driven by the external effects of firms' investment decisions. The "no news can be good news" section draws an analogy between increases in uncertainty and improvements in the quality of information, with the conclusion that an improvement in information may also lead to a suboptimal recession

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