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Too much investment: a problem of coordination failure
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De Meza, David and Lockwood, Ben (2004) Too much investment: a problem of coordination failure. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.703).
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Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Abstract
This paper shows that coordination failure and contractual incompleteness can lead to socially excessive investment. Firms and workers choose investment levels then enter a stochastic matching process. If investment levels are discrete, then if match frictions are low enough, high investing workers (firms) impose a negative pecuniary externality on any worker (firm) who cuts investment, even by one unit. Specifically, if a worker cuts investment, he subsequently bargains with a firm which has a high outside option due to the fact it can easily match with another high investing worker; this lowers the private net benefit to cutting investment below the social net benefit. A similar argument establishes that over-investment can occur when agents are heterogenous i.e. differ in their cost of investing, even if investments are continuous. Then, over-investment occurs because low-cost investors have a private incentive to invest to shift rent away from high-cost investors. Our model can also explain some recent trends in graduate/non-graduate wage differentials.
| Item Type: | Working or Discussion Paper (Working Paper) | ||||
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| Subjects: | H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management Q Science > QA Mathematics |
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| Divisions: | Faculty of Social Sciences > Economics | ||||
| Library of Congress Subject Headings (LCSH): | Business planning, Investment analysis, Stochastic processes, Matching theory | ||||
| Series Name: | Warwick economic research papers | ||||
| Publisher: | University of Warwick, Department of Economics | ||||
| Place of Publication: | Coventry | ||||
| Official Date: | March 2004 | ||||
| Dates: |
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| Number: | No.703 | ||||
| Number of Pages: | 41 | ||||
| Status: | Not Peer Reviewed | ||||
| Access rights to Published version: | Open Access |
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