| Number |
CREPEDP-178 |
| Publication Date |
November 2025 |
| Title |
Incomplete Information and Irreversible Investment |
| Author |
Jonathan Adams, Cheng Chen, Min Fang, Takahiro Hattori, and Eugenio Rojas
|
| Abstract |
How does incomplete information affect capital when investments are irreversible? We
use a continuous-time model to analytically characterize how these frictions distort firms’
decisions and the distribution of capital. Irreversibility causes misallocation and inaction;
incomplete information amplifies the friction, increasing aggregate capital and allocating it
less efficiently. Counterintuitively, firms with worse information are less likely to be inactive;
they are more willing to invest and do so inefficiently. But their investment is also less
responsive to macroeconomic shocks. We test and quantify these predictions using Japanese
administrative data that match firms’ forecasts with their balance sheets, incomes, and expenditures.
In the data, firms underreact to news as if they face information frictions; those
with more extreme underreaction are less inactive, as predicted.
|
| Keywords |
Heterogeneous Firms, Incomplete Information, Irreversible Investment, Heterogeneous
Beliefs, Misallocation, Investment Volatility |
| Other information |
Paper in English (78 pages) |