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Investor beliefs about transformative innovations under uncertainty

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  • Johannes Binswanger
  • Anja Garbely
  • Manuel Oechslin

Abstract

Modern economies sometimes produce potentially transformative innovations whose development and implementation involves large amounts of capital. Often, the required initial investments are fraught with uncertainty, and there is a scarcity of objective information that would help interested investors to predict success. How, in this situation, do investors form subjective beliefs about prospective returns? This paper explores the role of competing, specialized financial intermediaries that are incentivized to steer capital either towards or away from a potentially transformative innovation. We develop a model in which investors' subjective beliefs arise from a competitive campaign game, or belief contest, between two financial intermediaries. We discuss how a financial regulator—who does not possess superior information—may influence the contest outcome in favour of impartial beliefs, away from exuberant or overly pessimistic ones.

Suggested Citation

  • Johannes Binswanger & Anja Garbely & Manuel Oechslin, 2023. "Investor beliefs about transformative innovations under uncertainty," Economica, London School of Economics and Political Science, vol. 90(360), pages 1119-1144, October.
    • Handle: RePEc:bla:econom:v:90:y:2023:i:360:p:1119-1144
    DOI: 10.1111/ecca.12488
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