Investment options and the business cycle
By: Boyan Jovanovic.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series -- no. 13307.; Working paper series (National Bureau of Economic Research) -- working paper no. 13307.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 48
Subjects: Capital investments -- Mathematical models; Business cycles -- Mathematical models; Equilibrium (Economics)
Description: This paper extends Lucas (1978) to a production economy with two capital goods. It is an RBC model in which each unit of investment requires a new idea, an "option". When options are scarce, new capital is harder to put in place and the value of old capital rises. Thus the stock market and Tobin's Q are negative indexes of intangibles. During a boom, Q rises gradually, as options are used up. Because investment represents an exercise of options, it has an intertemporal substitution tradeoff that is absent in the adjustment-cost model. Equilibrium may be efficient even without markets for knowledge; the stock market may suffice.
Notes: "August 2007"

Includes bibliographical references (p. 34-37).

Also available in PDF from the NBER world wide web site (www.nber.org).