A Feedback Effect from Stock Market Trading to Innovations in a Bertrand Duopoly
35 Pages Posted: 26 Jan 2013
Date Written: January 20, 2013
Knowledge spillover often influences firms' innovation decisions and consequently the technological advance of an industry. Spillover may be caused by involuntary or strategic disclosures of firms' intermediary R&D progress, it can also occur due to the feedback from stock prices to decisions about innovation investment. In this paper, I endogenize the probability of knowledge spillover, which is no longer the consequence of disclosure strategies. I show that changes in stock price can amount to information leakage about the success probability of an innovation, which induces the interdependence between the fundamentals and the amount of information produced in the stock market. When providing additional information to competing firms in a Bertrand duopoly, this feedback effect may also result in fewer innovations and decreased consumer welfare, provided that the innovation requires low investment and has a low success rate. The overall impact also depends on the incentives of traders in the stock market.
Keywords: Knowledge spillover, feedback, information efficiency
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