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|
|Contact details of provider:|| Postal: Manufacture des Tabacs, Aile Jean-Jacques Laffont, 21 Allée de Brienne, 31000 TOULOUSE|
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
References listed on IDEAS
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.:
- Joseph Zeira, 2000.
"Informational overshooting, booms and crashes,"
Federal Reserve Bank of San Francisco, issue Apr.
- Alessandro Barbarino & Boyan Jovanovic, 2004.
"Shakeouts and Market Crashes,"
NBER Working Papers
10556, National Bureau of Economic Research, Inc.
- Bengt Holmstrom & Jean Tirole, 1997.
"Financial Intermediation, Loanable Funds, and The Real Sector,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 112(3), pages 663-691.
- 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.
- Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 655-675.
- Zeira, Joseph, 1987. "Investment as a Process of Search," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 204-210, February.
- Lubos Pastor & Pietro Veronesi, 2004.
"Was There a Nasdaq Bubble in the Late 1990s?,"
NBER Working Papers
10581, 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.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
- 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.
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.