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
Date Written: July 6, 2011
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: Suggested Citation