Investment Options and the Business Cycle

Boyan Jovanovic ()

No 13307, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E3 E44 (search for similar items in EconPapers)
Date: 2007-08
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Note: PR EFG
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Published as Jovanovic, Boyan, 2009. "Investment options and the business cycle," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2247-2265, November.

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Related works:
Journal Article: Investment options and the business cycle (2009)
Working Paper: Investment Options and the Business Cycle (2006)
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