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Irreversible investment and strategic interaction

Author: Fatás, Antonio ; Metrick, AndrewINSEAD Area: Economics and Political ScienceIn: Economica, no. 64, feb. 1997 Language: EnglishDescription: p.31-47.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: 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
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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

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