The Lifecycle of the Financial Sector and Other Speculative Industries
Speculative 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.
|Date of creation:||Apr 2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +33 (0)5 61 12 85 89
Fax: + 33 (0)5 61 12 86 37
Web page: http://www.idei.fr/
More information through EDIRC
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.:
- Zeira, Joseph, 1987. "Investment as a Process of Search," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 204-10, February.
- 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.
- Pástor, Luboš & Veronesi, Pietro, 2004. "Was There A Nasdaq Bubble in the Late 1990s?," CEPR Discussion Papers 4485, C.E.P.R. Discussion Papers.
- 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.
- 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.
- Alessandro Barbarino & Boyan Jovanovic, 2007.
"Shakeouts And Market Crashes,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 385-420, 05.
- 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.
- Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
- 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.
- Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 655-75, July.
- Zeira, Joseph, 1993.
"Informational Overshooting, Booms and Crashes,"
CEPR Discussion Papers
823, C.E.P.R. Discussion Papers.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ide:wpaper:20590. See general information about how to correct material in RePEc.
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.