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Irreversible Investment and Strategic Interaction
Author(s) -
Fatàs Antonio,
Metrick Andrew
Publication year - 1997
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/1468-0335.00062
Subject(s) - investment (military) , economics , recession , externality , microeconomics , aggregate (composite) , mechanism (biology) , aggregate demand , monetary economics , macroeconomics , monetary policy , philosophy , materials science , epistemology , politics , political science , law , composite material
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 suboptimal 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.