very preliminary Investment Dynamics with Common and Private Values

We consider a simple investment game, where each …rm observes its idiosyn-cratic cost of investment, and a signal correlated with investment returns. In each round, …rms that have not yet invested observe the history and choose whether to invest. Our analysis di¤ers from the previous herding literature in that the timing of investment decisions is endogenous. We …nd that the ‡exibility to postpone investment can be a source of ine¢ciency, as …rms with favorable signals delay their investment and free ride o ¤ the information pro-vided by others. However, ‡exibility can promote e¢ciency, because …rms with the most favorable information choose to invest …rst, allowing other …rms to learn. For some large markets, there is an initial surge in investment, nearly revealing the state of the economy, and outcomes are (almost) e¢cient. For other large markets, there is a positive probability of no investment, even when the return is high and all …rms would stand to pro…t. 1