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Dynamics of Innovation and Risk

Author

Listed:
  • Bruno Biais

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Jean-Charles Rochet

    (UZH - Universität Zürich [Zürich] = University of Zurich, TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Paul Woolley

    (LSE - London School of Economics and Political Science)

Abstract

We study the dynamics of an innovative industry in which agents learn about the likelihood of negative shocks. Managers can exert risk prevention effort to mitigate the consequences of shocks. If no shock occurs, confidence improves, attracting managers to the innovative sector. But, when confidence becomes high, inefficient managers exerting low risk-prevention effort also enter. This stimulates growth, while reducing risk prevention. The longer the boom, the larger the losses if a shock occurs. Although these dynamics arise in the first-best, asymmetric information generates excessive entry of inefficient managers, earning informational rents, inflating the innovative sector, and increasing its vulnerability

Suggested Citation

  • Bruno Biais & Jean-Charles Rochet & Paul Woolley, 2015. "Dynamics of Innovation and Risk," Post-Print halshs-01400249, HAL.
    • Handle: RePEc:hal:journl:halshs-01400249
    DOI: 10.1093/rfs/hhv003
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    Cited by:

    1. Ulf Axelson & Philip Bond, 2015. "Wall Street Occupations," Journal of Finance, American Finance Association, vol. 70(5), pages 1949-1996, October.
    2. Yuming Zhai & Zhenghuan Cai & Han Lin & Ming Yuan & Ye Mao & Mingchuan Yu, 2022. "Does better environmental, social, and governance induce better corporate green innovation: The mediating role of financing constraints," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(5), pages 1513-1526, September.
    3. Enrico Perotti & Magdelena Rola-Janicka, 2019. "Funding Shocks and Credit Quality," Tinbergen Institute Discussion Papers 19-060/IV, Tinbergen Institute.
    4. Jianxing Wei & Tong Xu, 2018. "A Model of Bank Credit Cycles," 2018 Meeting Papers 610, Society for Economic Dynamics.
    5. Ni, Jian & Xu, Yue & Shi, Jia & Li, Jiali, 2024. "Product innovation in a supply chain with information asymmetry: Is more private information always worse?," European Journal of Operational Research, Elsevier, vol. 314(1), pages 229-240.
    6. Basak, Deepal & Murray, Alexander & Zhao, Yunhui, 2017. "Does Financial Tranquility Call for More Stringent Regulation?," MPRA Paper 81373, University Library of Munich, Germany.
    7. Shahab, Yasir & Tianzi, Wang & Hussain, Tanveer & Kumar, Satish, 2023. "Foreign experience and audit report lag," Finance Research Letters, Elsevier, vol. 57(C).
    8. Wei, Jianxing & Xu, Tong, 2024. "Banking supervision with loopholes," European Economic Review, Elsevier, vol. 161(C).
    9. Deepal Basak & Mr. Yunhui Zhao, 2018. "Does Financial Tranquility Call for Stringent Regulation?," IMF Working Papers 2018/123, International Monetary Fund.
    10. Enrico Perotti & Magdalena Rola-Janicka, 2022. "The Good, the Bad, and the Missed Boom," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 5025-5056.

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