Under-diversification fuels excessive risk-taking, leading to economic inefficiencies and underinvestment.
The article explores how individual uncertainties affect asset prices and investment decisions. It shows that when companies don't spread their investments widely enough, it can lead to underinvestment and too much risk-taking overall. This happens because firms don't consider how their choices impact the risks faced by others. The study suggests that regulating finances with tax benefits on debt and specific capital requirements could help improve the situation.