Cooperation Cycles: A theory of endogenous investment shocks

Dimitris Papanikolaou

No 71, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We provide a theory of endogenous shocks to the marginal efficiency of investment that is based on a limited commitment friction in the creation of new capital. Inventors generate ideas but are inefficient at implementing them. When inventors collaborate with firms, their ideas can be implemented more efficiently. However, firms cannot commit to appropriately compensate inventors. The best ideas are those most at risk of theft, since reputational concerns are insufficient to always discipline firms. The fear of expropriation leads inventors to implement their best ideas inefficiently without firms. Good news about future technological progress increases the value of future business and thus disciplines firms away from expropriating better ideas, leading to increases in measured productivity and the returns to new investment. In contrast to standard models, this mechanism leads to an investment boom and increased economic growth in response to good news about future technologies.

Date: 2015
New Economics Papers: this item is included in nep-dge and nep-ino
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