When Does Competition Lead to Efficient Investments?

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Abstract
The paper studies agents' investment decisions between general and specific investments under different ownership structures in a thin, decentralized market where each agent's decision affects 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 efficient investments, regardless of asset ownership. In the absence of such excess competition, in every equilibrium, inefficient investments will result, unless some special ownership arrangement is made. The problem in which the choice variable is investment level, instead of investment type, is also studied.

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