The dynamics of innovation and risk

Bruno Biais, Jean Rochet and Paul Woolley

No 13-448, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We study the dynamics of an innovative industry when agents learn about the likelihood of negative shocks. Managers can exert risk-prevention effort to mitigate the consequences of shocks. If no shock occurs, confidence improves, attracting managers to the innovative sector. But, when condence becomes high, inefficient managers exerting low risk-prevention effort also enter. This stimulates growth, while reducing risk-prevention. The longer the boom, the larger the losses if a shock occurs. While these dynamics arise in the first-best, asymmetric information generates excessive entry of inefficient managers, earning informational rents, inflating the innovative sector and increasing its vulnerability.

Date: 2013-10
New Economics Papers: this item is included in nep-cta, nep-ino and nep-tid
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Related works:
Journal Article: Dynamics of Innovation and Risk (2015)
Working Paper: Dynamics of Innovation and Risk (2015)
Working Paper: The dynamics of innovation and risk (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:27746

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