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Investment Options and the Business Cycle

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  • Boyan Jovanovic

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13307.

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Date of creation: Aug 2007
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Publication status: published as Jovanovic, Boyan, 2009. "Investment options and the business cycle," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2247-2265, November.
Handle: RePEc:nbr:nberwo:13307

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Cited by:
  1. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 120(2), pages 304 - 345.
  2. Nancy Stokey, 2013. "Uncertainty and Investment Options," 2013 Meeting Papers, Society for Economic Dynamics 251, Society for Economic Dynamics.
  3. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2007. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Working Papers 13199, National Bureau of Economic Research, Inc.
  4. Rousakis, Michael, 2012. "Implementation Cycles : Investment-Specific Technological Change and the Length of Patents," The Warwick Economics Research Paper Series (TWERPS) 983, University of Warwick, Department of Economics.
  5. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2235-2246, November.
  6. Nancy L. Stokey, 2013. "Wait-and-See: Investment Options under Policy Uncertainty," NBER Working Papers 19630, National Bureau of Economic Research, Inc.

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