Growth, innovation, credit constraints, and stock price bubbles

Sicheng He ()
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Sicheng He: Nankai University

Journal of Economics, 2021, vol. 133, issue 3, No 2, 239-269

Abstract: Abstract We study the potential for rational bubbles in the innovation sector to affect long term economic growth. We show that stock market prices of research and development (R&D) firms can include a bubble component when credit constraints are present. Bubbles are self-sustained in equilibrium by a “liquidity” premium that originates when credit constraints are relaxed. Bubbles expand the borrowing and production capacities of R&D firms, stimulate innovation, and increase the growth rate. Small firms benefit more from bubbles than big firms. Bubbles are magnified by tighter credit constraints and scarce investment opportunities. Thus, financially underdeveloped countries benefit more from bubbles. Finally, we show that bubbles can create permanent reallocation effects that benefit the innovation sector over other sectors.

Keywords: Endogenous growth; Bubbles; Innovation (search for similar items in EconPapers)
JEL-codes: G10 O30 O41 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:133:y:2021:i:3:d:10.1007_s00712-021-00734-y

DOI: 10.1007/s00712-021-00734-y

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