The Lifecycle of the Financial Sector and Other Speculative Industries
AbstractSpeculative industries exploit novel technologies subject to two risks. First, there is uncertainty about the fundamental value of the innovation: is it strong or fragile? Second, it is difficult to monitor managers, which creates moral hazard. Because of moral hazard, managers earn agency rents in equilibrium. As time goes by and profits are observed, beliefs about the industry are rationally updated. If the industry is strong, confidence builds up. Initially this spurs growth. But increasingly confident managers end up requesting very large rents, which curb the growth of the speculative sector. If rents become too high, investors may give up on incentives, and risk and failure rates rise. Furthermore, if the innovation is fragile, eventually there is a crisis, and the industry shrinks. Our model thus captures important stylized facts of the financial innovation wave which took place at the beginning of this century.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 09-031.
Date of creation: Apr 2009
Date of revision:
Other versions of this item:
- Bruno Biais & Jean-Charles Rochet & Paul Woolley, 2009. "The lifecycle of the financial sector and other speculative industries," LSE Research Online Documents on Economics 24417, London School of Economics and Political Science, LSE Library.
- Biais, Bruno & Rochet, Jean-Charles & Woolley, Paul, 2009. "The Lifecycle of the Financial Sector and Other Speculative Industries," IDEI Working Papers 549, Institut d'Économie Industrielle (IDEI), Toulouse.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-22 (All new papers)
- NEP-BAN-2010-05-22 (Banking)
- NEP-BEC-2010-05-22 (Business Economics)
- NEP-CTA-2010-05-22 (Contract Theory & Applications)
- NEP-TID-2010-05-22 (Technology & Industrial Dynamics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pastor, Lubos & Veronesi, Pietro, 2006.
"Was there a Nasdaq bubble in the late 1990s?,"
Journal of Financial Economics,
Elsevier, vol. 81(1), pages 61-100, July.
- Lubos Pastor & Pietro Veronesi, 2004. "Was There a Nasdaq Bubble in the Late 1990s?," NBER Working Papers 10581, National Bureau of Economic Research, Inc.
- Pietro Veronesi & Lubos Pastor, 2005. "Was There a Nasdaq Bubble in the Late 1990s?," 2005 Meeting Papers 95, Society for Economic Dynamics.
- Pástor, Luboš & Veronesi, Pietro, 2004. "Was There A Nasdaq Bubble in the Late 1990s?," CEPR Discussion Papers 4485, C.E.P.R. Discussion Papers.
- Zeira, Joseph, 1987. "Investment as a Process of Search," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 204-10, February.
- Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
- Alessandro Barbarino & Boyan Jovanovic, 2004.
"Shakeouts and Market Crashes,"
NBER Working Papers
10556, National Bureau of Economic Research, Inc.
- repec:bla:restud:v:75:y:2008:i:3:p:809-833 is not listed on IDEAS
- Holmström, Bengt & Tirole, Jean, 1994.
"Financial Intermediation, Loanable Funds and the Real Sector,"
IDEI Working Papers
40, Institut d'Économie Industrielle (IDEI), Toulouse.
- Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
- Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
- Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
- Guido Lorenzoni, 2007.
"Inefficient Credit Booms,"
NBER Working Papers
13639, National Bureau of Economic Research, Inc.
- Thomas Philippon & Ariell Reshef, 2007. "Skill Biased Financial Development: Education, Wages and Occupations in the U.S. Financial Sector," NBER Working Papers 13437, National Bureau of Economic Research, Inc.
- Zeira, Joseph, 1999.
"Informational overshooting, booms, and crashes,"
Journal of Monetary Economics,
Elsevier, vol. 43(1), pages 237-257, February.
- Ramadorai, Tarun, 2008.
"The Secondary Market for Hedge Funds and the Closed-Hedge Fund Premium,"
CEPR Discussion Papers
6877, C.E.P.R. Discussion Papers.
- Tarun Ramadorai, 2012. "The Secondary Market for Hedge Funds and the Closed Hedge Fund Premium," Journal of Finance, American Finance Association, vol. 67(2), pages 479-512, 04.
- Oh, Frederick Dongchuhl, 2013. "Contagion of a liquidity crisis between two firms," Journal of Financial Economics, Elsevier, vol. 107(2), pages 386-400.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.