Working Paper: CEPR ID: DP5928
Authors: Gilles Saint-Paul
Abstract: I study how savers allocate funds between boundedly rational firms which follow simple pricing rules. Firms need cash to pay their inputs in advance, and savers-shareholders allocate cash between them so as to maximize their rate of return. When the rate of return on each firm is observed, there are multiple equilibria, and some degree of monopoly power is sustained. However, the economy gets close to the Walrasian equilibrium when the availability of funds goes to infinity. Multiple equilibria also arise when there are ?entrants? with unobservable rates of return. In an equilibrium where entrants are not funded, savers invest in incumbents because those entrants which will divert customers from incumbents are likely to be excess underpricers.
Keywords: bounded rationality; credit allocation; evolution; selection; winners curse
JEL Codes: D4; D5; Z19
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| savers allocate cash to firms that maximize their rate of return (D14) | selection process favoring firms that may not be the most efficient (L11) |
| savers allocate cash to firms that maximize their rate of return (D14) | misallocation of resources (D61) |
| scarcity of cash influences which firms succeed in the market (D43) | resources may be disproportionately allocated to overpricing firms instead of underpricing ones (L11) |
| allocation of cash affects firm performance (G32) | market dynamics (D49) |
| existence of multiple equilibria (C62) | allocation of funds to entrants vs incumbents (D72) |