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Growth, innovation, credit constraints, and stock price bubbles

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  • Sicheng He

    (Nankai University)

Abstract

We study the potential for rational bubbles in the innovation sector to affect long term economic growth. We show that stock market prices of research and development (R&D) firms can include a bubble component when credit constraints are present. Bubbles are self-sustained in equilibrium by a “liquidity” premium that originates when credit constraints are relaxed. Bubbles expand the borrowing and production capacities of R&D firms, stimulate innovation, and increase the growth rate. Small firms benefit more from bubbles than big firms. Bubbles are magnified by tighter credit constraints and scarce investment opportunities. Thus, financially underdeveloped countries benefit more from bubbles. Finally, we show that bubbles can create permanent reallocation effects that benefit the innovation sector over other sectors.

Suggested Citation

  • Sicheng He, 2021. "Growth, innovation, credit constraints, and stock price bubbles," Journal of Economics, Springer, vol. 133(3), pages 239-269, August.
    • Handle: RePEc:kap:jeczfn:v:133:y:2021:i:3:d:10.1007_s00712-021-00734-y
    DOI: 10.1007/s00712-021-00734-y
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    References listed on IDEAS

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    More about this item

    Keywords

    Endogenous growth; Bubbles; Innovation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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