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Can Optimism about Technology Stocks Be Good for Welfare? Positive Spillovers vs. Equity Market Losses

Katrin Tinn () and Evangelia Vourvachaki ()

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: This paper analyzes the impact of equity market information imperfections on R&D driven growth. The mechanism proposed is built on two premises. First, the R&D-sector relies largely on equity finance, because of its production features. Second, equity can be persistently mispriced. This is due to investors rationally taking into account both private and public information. This paper shows that optimism in equity market can generate long-run consumption gains, despite the excess capital losses realized in the short-run. This result arises from the externalities in R&D production that result in uderinvestment in R&D in a market economy with perfect information.

Keywords: Equity mispricing; R&D growth; Optimism; Welfare. (search for similar items in EconPapers)
JEL-codes: G12 O30 O40 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-ino
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