English, Article, Journal or magazine article edition: Investment Options and the Business Cycle Boyan Jovanovic

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Bookmark: http://trove.nla.gov.au/version/56327
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Investment Options and the Business Cycle
Author
  • Boyan Jovanovic
Physical Description
  • preprint
Notes
  • 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.
  • RePEc:nbr:nberwo:13307
  • 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, Tobin’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
  • Volatility, Tobin's q
  • RePEc:red:sed006:66
Language
  • English
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