Can overpricing of technology stocks be good for welfare? Positive spillovers vs. equity market losses

Katrin Tinn and E Vourvachaki

Working Papers from Imperial College, London, Imperial College Business School

Abstract: This paper examines the real impact of booms-and-busts of equity prices of technology-intensive firms, such as the late 1990s episode. We emphasize that what makes such episodes different from booms-and-busts related to other assets is the presence of knowledge spillovers. Such spillovers imply underinvestment in R&D at the aggregate level. Therefore, when temporarily high equity prices create incentives to invest more in R&D there are permanent wage and productivity gains. Sufficient conditions for these gains to always offset the direct negative effects from losses of equity trading and firm-level overinvestment are that overpricing is small and lasts longer.

Date: 2012-12-31
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Persistent link: https://EconPapers.repec.org/RePEc:imp:wpaper:12192

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