This paper extends Lucas (1978) to a production economy with two capital goods. It is an RBC model in which each unit of investment requires a new idea, an "option". When options are scarce, new capital is harder to put in place and the value of old capital rises. Thus the stock market and Tobin's Q are negative indexes of intangibles. During a boom, Q rises gradually, as options are used up. Because investment represents an exercise of options, it has an intertemporal substitution tradeoff that is absent in the adjustment-cost model. Equilibrium may be efficient even without markets for knowledge; the stock market may suffice.
A firm has investment options that it may use up immediately, or store for future use. A patent, e.g., is an option to implement an idea via a product or process innovation. Other investment
options are protected by secrecy. An investment option is a profit opportunity that requires an investment to implement. Because investment options are scarce, Tobinâ€™s q is always above unity. When the stock of these options rises,
the value of stock market falls, a result that exactly invalidates the use of the stock market as a positive indicator of the stock of intangibles. Finally, the stock market alone ensures that equilibrium is efficient
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