Can Overpricing Technology Stocks Be Good For Welfare? Positive Spillovers vs. Equity Market Losses

64 Pages Posted: 27 Mar 2008 Last revised: 2 Sep 2014

See all articles by Katrin Tinn

Katrin Tinn

McGill University - Desautels Faculty of Management; Centre for Economic Policy Research (CEPR)

Evangelia Vourvachaki

CERGE-EI

Date Written: July 6, 2011

Abstract

This paper examines the real impact of "booms-and-busts" of technology-intensive firms, such as the late 1990s episode. We emphasize that what makes such episodes different from "booms-and-busts" related to other assets is the presence of knowledge spillovers. Such spillovers imply underinvestment in R&D at the aggregate level. When temporarily high equity prices create incentives to invest more in R&D there are permanent wage and productivity gains in general equilibrium. Sufficient conditions for these gains to always offset the direct negative effects from losses of equity trading and firm-level overinvestment are that overpricing is small and lasts longer.

Keywords: Equity mispricing, R&D growth, Welfare

JEL Classification: G12, O30, O40

Suggested Citation

Tinn, Katrin and Vourvachaki, Evangelia, Can Overpricing Technology Stocks Be Good For Welfare? Positive Spillovers vs. Equity Market Losses (July 6, 2011). Available at SSRN: https://ssrn.com/abstract=1107978 or http://dx.doi.org/10.2139/ssrn.1107978

Katrin Tinn (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Evangelia Vourvachaki

CERGE-EI ( email )

Politickych veznu 7
Prague, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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