Technology Adoption, Bubbles, Network Externalities and Growth

46 Pages Posted: 25 Feb 2014

See all articles by David Zvilichovsky

David Zvilichovsky

Coller School of Management Tel Aviv University

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Date Written: December 30, 2013

Abstract

Can stock market bubbles accelerate long term growth? Do such bubbles indicate irrational behavior? This paper studies the effect of innovation uncertainty on the concomitant time path of firm valuations, technology adoption and growth in a setting that incorporates positive network externalities. In such a setting a bubble may form under rational expectations. The resulting valuation bubble, induced by uncertainty and accelerated by positive externalities, may serve as a coordination mechanism supporting accelerated post-bubble growth. Such a path may compensate for the inability of market participants to internalized and exploit the full potential of positive externalities. It may also overcome the chilling effects often attributed to the adoption process of externality intensive innovations. Under the framework proposed, uncertainty may improve long-term growth. This setup may also be used to explain the accelerated productivity that followed the bursting of notable technology related bubbles such as the railway bubble of 19th century England and the 20th century ICT bubble. Attributing a productive role to certain bubbles may have far-reaching policy implications.

Keywords: Bubbles, Technology Adoption, Network Externalities, Growth, Innovation, Uncertainty

JEL Classification: O33, L1, O40, N1, E32

Suggested Citation

Zvilichovsky, David, Technology Adoption, Bubbles, Network Externalities and Growth (December 30, 2013). Available at SSRN: https://ssrn.com/abstract=2400702 or http://dx.doi.org/10.2139/ssrn.2400702

David Zvilichovsky (Contact Author)

Coller School of Management Tel Aviv University ( email )

Tel Aviv University
Ramat Aviv, Tel Aviv, 69978
Israel

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