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Bubbles and the Value of Innovation

Author

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  • Valentin Haddad
  • Paul Ho
  • Erik Loualiche

Abstract

Episodes of booming innovation coincide with intense speculation in financial markets leading to bubbles—increases in market valuations and firm creation followed by a crash. We provide a framework reproducing these facts that makes a rich set of predictions on how speculation changes both the private and social values of innovation. We confirm the theory in the universe of U.S. patents issued from 1926 through 2010. Measures based on financial market information indicate that speculation increases the private value of innovation and reduces negative spillovers to competing firms. No commensurate change occurs in measures grounded in real outcomes.

Suggested Citation

  • Valentin Haddad & Paul Ho & Erik Loualiche, 2020. "Bubbles and the Value of Innovation," Working Paper 20-08, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:88433
    DOI: 10.21144/wp20-08
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    Cited by:

    1. ÅžimÅŸek, Alp, 2021. "The Macroeconomics of Financial Speculation," CEPR Discussion Papers 15733, C.E.P.R. Discussion Papers.
    2. Eduardo Dávila & Ansgar Walther, 2023. "Prudential Policy with Distorted Beliefs," American Economic Review, American Economic Association, vol. 113(7), pages 1967-2006, July.
    3. Hiroatsu Tanaka, 2022. "Equilibrium Yield Curves with Imperfect Information," Finance and Economics Discussion Series 2022-086, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Bubbles; Innovation; patents;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G4 - Financial Economics - - Behavioral Finance
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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