Do Optimists Grow Faster and Invest More?

39 Pages Posted: 25 Feb 2002

See all articles by Marcin T. Kacperczyk

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; Centre for Economic Policy Research (CEPR)

Zbigniew W. Kominek

European Bank for Reconstruction and Development (EBRD)

Date Written: March 2002

Abstract

We discuss a two-period model of an economy with two industries, positive production externalities and random shocks to production functions. Multiple equilibria that arise in such a framework can be ranked according to agent's optimism. The equilibria with higher levels of optimism are characterized by higher economic growth, higher production growth and higher proportion of investments in externality yielding industries. Our model also suggests that time-varying risk perception and overconfidence level have impact on the industry and aggregate economic variables. Using the U.S. data, it is shown that changes in sentiment predict economic growth. Sentiment has significant positive impact on industry growth, aggregate economic growth and relative levels of investment in industries. Externality yielding industries also appear to be more affected by shifts in sentiment than non-externality yielding industries.

Keywords: Sentiment, Investment, Economic growth, Production externalities

JEL Classification: D92, G31, O16

Suggested Citation

Kacperczyk, Marcin T. and Kominek, Zbigniew W., Do Optimists Grow Faster and Invest More? (March 2002). EFMA 2002 London Meetings, Sauder School of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=301242 or http://dx.doi.org/10.2139/ssrn.301242

Marcin T. Kacperczyk (Contact Author)

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Zbigniew W. Kominek

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

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