Working Paper: NBER ID: w13307
Authors: Boyan Jovanovic
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E3; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| scarcity of investment options (seeds) (Q14) | difficulty in implementing new capital (O16) |
| difficulty in implementing new capital (O16) | increase in the value of existing capital (trees) (E22) |
| increase in the value of existing capital (trees) (E22) | increase in Tobin's q (D25) |
| scarcity of investment options (seeds) (Q14) | increase in the value of existing capital (trees) (E22) |
| availability of seeds (Q16) | increase in investment during recessions (E22) |
| increase in investment during recessions (E22) | decrease in Tobin's q (D25) |
| drawing down of seeds during economic booms (E32) | increase in Tobin's q (D25) |
| intertemporal substitution in investment (D15) | increase in volatility of Tobin's q (E32) |
| seeds model (O41) | higher correlation between investment and Tobin's q during booms (E32) |