Information manipulation and rational investment booms and busts

Praveen Kumar, Nisan Langberg

Research output: Contribution to journalArticlepeer-review

Abstract

A model of endogenous investment booms and busts with rational agents is presented where outside investors are uncertain about both industry (aggregate) and firm-specific capital productivity, and insiders manipulate information through strategic productivity disclosures. For intermediate and high levels of agency conflict, there are aggregate investment distortions along the equilibrium path, investment dynamics are history-dependent, and depict patterns of persistent investment booms or investment busts even though investors design optimal incentive contracts based on Bayes-rational beliefs. Moreover, the aggregate uncertainty may not be resolved in the limit, as the number of firms and disclosures gets arbitrarily large.

Original languageEnglish
Pages (from-to)408-425
Number of pages18
JournalJournal of Monetary Economics
Volume60
Issue number4
DOIs
StatePublished - May 2013
Externally publishedYes

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