Evidence Of Overinvestment Research Articles

The Effects of Demand and Interest Rates on Investments, Evidence of Overinvestment from Two Behavioral Experiments

This article analyzes the causes of overinvestment and thus investment cycles with two behavioral experiments. In the experimental simulations increases in demand and cuts in interest rates increased unit profits, which led to uncoordinated and thus collectively too high investments (collective error). This made it possible to demonstrate collective errors that led to overinvestment and investment cycles (boom and bust cycles). Central banks and companies should take this into account when making their decisions. The experiments show the fundamental problem of uncoordinated supply adjustment and a tendency on the part of market participants to neglect the behavior of other actors and to underestimate the influence of the market on their own investment decisions.

Infrastructure and Urbanization in the People's Republic of China

The recent experience of infrastructure investment in the People’s Republic of China (PRC) suggests an intertwined relationship between investment, urbanization, and economic growth. In one mechanism, urbanization generates demand for infrastructure investment, which then drives economic growth via various channels including reducing transaction costs and raising productivity. Another mechanism emphasized in this paper is that infrastructure investment can promote urbanization through facilitating economic agglomeration toward hub cities. This agglomeration process also raises productivity in the economy. The lessons from the PRC have implications for infrastructure financing. On the one hand, recent reforms have allowed the market to play an increasingly important role in funding infrastructure investment, helping improve the efficiency of infrastructure investment and the productivity of the economy. On the other hand, evidence in the PRC suggests a cross-province spillover effect of road infrastructure, supporting the central government’s role in infrastructure financing. Although the current infrastructure investment system is still distorted by local governments’ incentives and decisions, there is no evidence of over-investment in infrastructure at the aggregate level. Nevertheless, there is strong evidence that the marginal return to infrastructure investment in the PRC has been rapidly declining. Hence, it is urgent for policy makers to reform the existing system to base their investment decisions on the economic returns to infrastructure.The interregional flow of goods and production factors (labor and capital) is a fundamental force that drives urbanization, but the market may not be efficient in financing and infrastructure construction. This paper analyzes infrastructure-related institutions and the interrelation between infrastructure and urbanization. It addresses the following issues: What is the relationship between infrastructure, growth, and urbanization? How efficient have investment and financing been for infrastructure construction? How can we evaluate the performance of infrastructure development? How and to what extent should the government be involved in infrastructure construction?

Investment policy at family firms: Evidence from Thailand

Using a unique, multi-year sample of publicly traded non-financial companies in Thailand, I find the level of family ownership influences the level of investment. The results are from an emerging market, which features concentrated, family-dominated corporate ownership structures, including ownership pyramids. Firms with higher levels of family ownership show higher investment ratios, whether the ratio is a fixed assets-based measure or a cash flow-based measure. The investment ratios exhibit greater sensitivity to financial slack. However, these two relations are dependent on the level of family ownership. I find evidence of underinvestment at lower levels of family ownership, plus evidence of overinvestment at family firms which employ pyramidal ownership structures. The results have implications for the efficiency of investment at family-owned firms.

Estimating the contribution of infrastructure to national productivity in Europe

Abstract While there is much interest in understanding the contribution that investment in different types of infrastructure can make to the economic development of cities, regions and nations, such research is constrained by various methodological difficulties. Following the approach of Égert, Kozluk and Sutherland (2009), this paper seeks to identify whether countries might be over- or under-investing in infrastructure relative to other forms of capital investment, from the point of view of raising productivity. While subject to various limitations (and also highlighting the continuing data constraints in this area), such an analysis provides a consistent and comparable basis on which to assess whether countries might benefit from additional infrastructure investment or, conversely, whether they might in fact stand to gain from alternative forms of fixed capital formation. The article analyses five types of infrastructure in the 27 Member States of the European Union (prior to 2013), Norway and Switzerland. We find some evidence of over-investment in electricity-generation capacity (investment in other forms of capital would likely yield higher productivity returns) and under-investment in roads, motorways and telephone infrastructure (there is potential for greater productivity growth from investing in these infrastructures). The evidence of a relationship between rail investment and productivity is less clear. While the results suggest that countries might stand to improve their national productivity by shifting the balance between infrastructure and other capital, higher productivity is not a country’s only objective. Resilient infrastructure provision and/or upgrades with a view to pursuing other objectives such as climate-change mitigation may take precedence, necessitating at least some degree of ‘non-optimal’ investment.

The Decline of Investment in East Asia Since the Asian Financial Crisis: An Overview and Empirical Examination

A key legacy of the Asian financial crisis of 1997-1998 is a sustained drop-off in the investment rates of East Asian countries that were hardest hit by the crisis. We first review the stylized facts of investment in those countries, and then explore and evaluate the various possible explanations for the decline in investment. In our empirical analysis, which expands upon Park and Shin (2009) by updating the data to include 2005-2008, we investigate the extent to which the investment rates of Asian countries can be explained by the underlying fundamental determinants of investment such as gross domestic product (GDP) growth and demographic variables. We also empirically revisit the various hypotheses put forth to explain the investment drop-off, in particular competitive pressures from the People's Republic of China and heightened risk and uncertainty. Our analysis yields two main findings: (i) some evidence of overinvestment in the precrisis period but (ii) very little evidence of underinvestment in the postcrisis period. The results suggest that investment rates are currently more or less at appropriate levels despite their postcrisis decline. The salient policy implication is that quantitatively boosting investment may be less important for future growth than enhancing the investment climate.