Inefficient Investment Waves

We propose a dynamic model of investment and trade in a market of a specialized technology subject to two main frictions. First, agents cannot raise outside capital. Second, a random group of agents will have the opportunity to invest in new technology and there is no market to insure against this shock. The first friction implies the presence of invesment cycles with abundant invesment and low returns in booms and little invesment and high returns in recessions. Only when the second friction is present invesment cycles are constrained ineffi cient. Often the ineffi ciency is two-sided with too much invesment in booms and too little in recessions from a social point of view. Interventions targetting only the underinvesment in recessions might make all agents worse off. Also, the two-sided ineffi ciency typically implies too volatile prices and too frequent realizations of abnormally low prices compared to fundamentals.