When does competition lead to efficient investments?

Abstract

The paper studies agents' general or specific investment decisions under different ownership structures in a thin, decentralized market where each agent's decision affects the decisions and welfare of other agents mainly through indirect market linkages. It focuses on the roles of both competition and ownership. An investor is more likely to make specific investments as an employee than as an owner. "Excess competition among investors" makes efficient, specific investments more likely. Otherwise, inefficient, general investments and irrelevance of ownership are more likely to result. The problem in which the choice variable is investment level, instead of investment type, yields less contrasting results.