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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, 2007. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Working Papers 13199, National Bureau of Economic Research, Inc.
  2. Bilbiie, Florin O. & Ghironi, Fabio & Melitz, Marc J., 2012. "Endogenous Entry, Product Variety, and Business Cycles," Scholarly Articles 10914281, Harvard University Department of Economics.
  3. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, Elsevier, vol. 144(6), pages 2235-2246, November.
  4. Nancy Stokey, 2013. "Uncertainty and Investment Options," 2013 Meeting Papers, Society for Economic Dynamics 251, Society for Economic Dynamics.
  5. Nancy L. Stokey, 2013. "Wait-and-See: Investment Options under Policy Uncertainty," NBER Working Papers 19630, National Bureau of Economic Research, Inc.
  6. Rousakis, Michael, 2012. "Implementation Cycles : Investment-Specific Technological Change and the Length of Patents," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 983, University of Warwick, Department of Economics.

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