TY  - JOUR
AU  - Jovanovic,Boyan
TI  - Investment Options and the Business Cycle
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13307
PY  - 2007
Y2  - August 2007
UR  - http://www.nber.org/papers/w13307
L1  - http://www.nber.org/papers/w13307.pdf
N1  - Author contact info:
Boyan Jovanovic
New York University
Department of Economics
19 W. 4th Street, 6th Floor
New York, NY  10012
Tel: 212/998-8953
Fax: 212/995-4186
E-Mail: Boyan.Jovanovic@nyu.edu
AB  - 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.
ER  -