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Optimal learning and new technology bubbles

Subject

Finance, Finance

Publishing details

Authors / Editors

Johnson T

Publication Year

2002

Abstract

It is widely believed that there is a fundamental linkage between major technological innovations, speculative fever, and wasteful overinvestment. This paper presents an equilibrium model of investment in a new industry, whose return-to-scale is not known in advance. Overinvestment relative to the full-information case is then optimal as the most efficient way to learn about the new technology. Moreover, the initial overinvestment is accompanied by apparently inflated stock prices and apparently negative expected excess returns in the new industry, which are also fully rational. This suggests a new interpretation of what seem to be stock market driven real bubbles.

Publication Research Centre

Institute of Finance and Accounting, Institute of Finance and Accounting

Series Number

FIN 372

Series

IFA Working Paper

Available on ECCH

No


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