Abstract:
Rational agents might choose to invest in a certain kind of capital in a period in the hope of making higher returns from their investments made in consecutive periods. We examine the impact of such an interaction on the incidence of coordination failure and accordingly social welfare. In our set-up, investment complementarities are present both within periods (call vertical complementarity) and between periods (call horizontal complementarity). In particular, other than the underlying economic fundamental, the return on investment depends on its aggregate level in that period as well as the aggregate investment made in the previous period. The results suggest that full transparency is optimal at the social level as long as agents have an access to relativelymorepreciseprivateinformationandcomplementaritiesaresufficientlylow. More transparency otherwise reduces social welfare as the gain from better vertical coordination is outweighed by the loss resulted from lesser horizontal coordination.
