Racing with a rearview mirror: Outcome lags and investment fluctuations

Département d'Economie et Sciences de la Décision

Intervenant:  Chantal Marlats (Panthéon Assas)

Salle T-014

Abstract :

periods of strictly decreasing investment and investment breaks, which vanish when investors are initially highly optimistic about the feasibility of innovation. This equilibrium contrasts sharply with the case without an outcome lag, where players invest a constant amount until the common belief reaches a critical threshold, after which investment stops forever. Our analysis thus identifies a novel, strategic, economic force
that drives fluctuations in R&D spending. We compare these equilibrium dynamics with the socially optimal solution and show that, while optimal investment is also non-monotonic under an outcome lag, the equilibrium is socially inefficient. Furthermore, we demonstrate that non-monotonic investment patterns persist when the outcome lag is uncertain, when investment costs are convex, and when investors have the flexibility to decide both when and how much to invest.

Joint work with: Nicolas Klein and Lucie Ménager