Working Paper: NBER ID: w2297
Authors: Andrei Shleifer; Robert Vishny
Abstract: In the presence of aggregate demand spillovers, an imperfectly competitive firm's profit is positively related to aggregate income, which in turn rises with profits of all firms in the economy. This pecuniary externality makes a dollar of a firm's profit raise aggregate income by more than a dollar, since other firms' profits also rise, and in this way gives rise to a "multiplier." Since such "multipliers" are ignored by firms making investment decisions, privately optimal investment choices under uncertainty will not in general be socially optimal. Under reasonable conditions, private investment is too low.
Keywords: Investment; Aggregate Demand Spillovers; Macroeconomic Externalities
JEL Codes: E22; E32; D92
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firm Profits (D21) | Aggregate Income (E16) |
| Firm Profits (D21) | Other Firms' Profits (L19) |
| Aggregate Income (E16) | Investment Decisions (G11) |
| Firm Profits (D21) | Investment Decisions (G11) |
| Investment Decisions (G11) | Social Optimality (D61) |
| State of Economy (E66) | Multipliers (C39) |