The Lifecycle of the Financial Sector and Other Speculative Industries

Biais, Bruno, Rochet, Jean-Charles and Woolley, Paul (2009) The Lifecycle of the Financial Sector and Other Speculative Industries. TSE Working Paper, n. 09-031

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Official URL: http://tse-fr.eu/pub/21941

Abstract

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.

Item Type: Monograph (Working Paper)
Language: English
Date: April 2009
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 18 Jan 2012 06:00
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:21941
URI: http://publications.ut-capitole.fr/id/eprint/3231

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