Optimal Learning, Overvaluation and Overinvestment

António Barbosa

MPRA Paper from University Library of Munich, Germany

Abstract: Periods of technological revolution are usually associated with overvaluation of and overinvestment by innovating firms. This paper develops a model that explains this behavior in a frictionless rational setting. When fully rational innovating firms face uncertainty about the returns to scale of their production functions, overinvestment emerges as the optimal way to learn about the returns to scale. The optimal learning is also shown to produce overvaluation. The model is also able to generate what an observer ex-post would identify as bubbles followed by overcorrection, negative excess returns in early periods, negative autocorrelation in excess returns and market-to-book and size effects.

Keywords: Learning; Investment Decision; Bubbles (search for similar items in EconPapers)
JEL-codes: D83 G12 G14 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-mic and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/97411/1/MPRA_paper_97411.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:97411

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().