When Does Competition Lead to Efficient Investments?

Abstract

The paper studies agents’ investment decisions between general and speci…c in-vestments under di¤erent ownership structures in a thin, decentralized market where each agent’s decision a¤ects the decisions and welfare of other (otherwise unrelated) agents mainly through indirect market linkages. The paper demonstrates that “excess competition among investors,” in every equilibrium, will lead to e¢cient investments, regardless of asset ownership. In the absence of such excess competition, in every equilibrium, ine¢cient investments will result, unless some special ownership arrange-ment is made. The problem in which the choice variable is investment level, instead of investment type, is also studied.