Innovations, Rational Exuberance and Investment

37 Pages Posted: 6 Mar 2011

See all articles by Praveen Kumar

Praveen Kumar

University of Houston - Department of Finance

Nisan Langberg

Tel Aviv University - Coller School of Management

Date Written: March 3, 2011

Abstract

We examine information aggregation and capital accumulation when there is structural uncertainty regarding capital productivity at the industry-level and information is revealed strategically through bilateral contracting. Firms enter sequentially and uninformed investors design sequentially rational renegotiation-proof contracts, based on observations of previous contract outcomes, to elicit information from managers with private signals. For an open set of parameters, investors endogenously get "stuck" at overoptimistic posterior productivity expectations and the useful information of managers of newly entering firms does not get incorporated in their decisions. Information is therefore not aggregated asymptotically and there is long run over-investment (when the true productivity is low) even though there is bilateral contracting for inducing information revelation.

Keywords: Information aggregation, Investment, Bilateral contracting, Noisy revelation

JEL Classification: G32, D23

Suggested Citation

Kumar, Praveen and Langberg, Nisan, Innovations, Rational Exuberance and Investment (March 3, 2011). AFA 2012 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1776188 or http://dx.doi.org/10.2139/ssrn.1776188

Praveen Kumar (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Nisan Langberg

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

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