The dynamics of innovation and risk

Biais, Bruno, Rochet, Jean-Charles and Woolley, Paul (2015) The dynamics of innovation and risk. Review of Financial Studies, 28 (5). pp. 1353-1380.

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Official URL: http://tse-fr.eu/pub/28353

Abstract

We study the dynamics of an innovative industry when agents learn about its strength, i.e., the likelihood that it gets hit by negative shocks. Managers can exert risk-prevention export to mitigate the consequences of such shocks. As time goes by, if no shock occurs, condence improves. This attracts managers to the innovative sector. But, when condence becomes high, less managers exerting low risk-prevention export also enter. This accelerates the growth of the industry, while inducing a decline in risk-prevention. The longer the boom, the stronger the condence, the larger the losses if a shock occurs. While the above dynamics arise in the first best, with asymmetric information there is excessive entry of inefficient managers, earning informational rents at the expense of inneficient managers. This inflates the innovative sector and increases its vulnerability.

Item Type: Article
Language: English
Date: 2015
Refereed: Yes
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSM Research (Toulouse), TSE-R (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:49
Last Modified: 23 Mar 2018 15:51
OAI ID: oai:tse-fr.eu:28353
URI: http://publications.ut-capitole.fr/id/eprint/16532

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