Can Optimism about Technology Stocks be Good for Welfare? Positive Spillovers vs. Equity Market Losses
CERGE-EI Working Paper No. 383
55 Pages Posted: 14 Aug 2009
Date Written: April 1, 2009
This paper analyzes the impact of equity market information imperfections on R&D driven growth. The mechanism proposed is built on two premises. First, the R&D-sector relies largely on equity finance, because of its production features. Second, equity can be persistently mispriced. This is due to investors rationally taking into account both private and public information. This paper shows that optimism in equity market can generate long-run consumption gains, despite the excess capital losses realized in the short-run. This result arises from the externalities in R&D production that result in underinvestment in R&D in a market economy with perfect information.
Keywords: equity mispricing, R&D growth, optimism, welfare
JEL Classification: G12, O3, O4
Suggested Citation: Suggested Citation