fatvegan

I wonder if the reason that markets don't investment properly is because the costs of over-investing are different to the costs of under-investing. Firms do well if they are good at predicting the optimal level of investment. If they can guess it perfectly their profits will be higher than for any other level. As their guesses get worse, their profits drop. But profits drop more if they are too optimistic than if they are too pessimistic. If they over-invest not only do they have to pay money for their investments, but the price of what they're selling will go down. If they under-invest they don't actually lose anything except revenue foregone. This probably suggests that the average investment error won't be zero.

Governments wouldn't have this bias so much because the costs to society of over-investment and under-investment are symmetrical. At least I think they are. Actually, they probably aren't. Over-investing in infrastructure by 10% costs society less than 10% of the optimal investment. Probably quite a lot less, because over-investing still provides returns, just not net returns. But who knows how much under-investing by 10% costs us? Maybe vast amounts.

So mostly just ignore what I was saying in that second paragraph. I still think that the private sector will systematically be biased towards under-investment. Which is bad, but who knows if it's worse than systematic over-investment.