In this paper we study a stochastic growth model with lags in the operation of new technologies. Technological innovations arrive exogenously to the economy and impact stocks through their option values. These innovations, however, cannot be readily implemented and undergo a process of adoption that involves the production of new varieties of intermediate goods. Our model is a simplified variant of those in Romer (1990) and Comin and Gertler (2006), but our objectives are quite different. Romer (1990) is concerned with innovations and economic growth and Comin and Gertler (2006) with a quantitative analysis of eco-nomic fluctuations. Our main goal is to build a quantitative framework in order to explore the possible channels of influence that technological innovations have on stock prices. As is commonly realized, financial markets can respond to various types of shocks and new information. Besides the high-frequency volatility that is deeply rooted in stock prices, the US stock market displays protracted episodes of high growth intertwined with shorter spells of price decreases and much lower returns. Jovanovic and Rousseau (2001) associate these long fluctuations in the stock market with three technological revolutions: Electricity, World War II, and IT. These authors document long lags in the operation and diffusion of new technologies. There are, however, plenty of other explanations for the long swings in stock values. Geanakoplos, Magill and Quinzii (2004) contend that these changes are driven by demographic trends, whilst Lustig and Nieuwerburgh (2006) cite credit access from home equity collateral. Our model is also intended to explain the overall evolution of the US stock market.
In contrast, several recent works have focused on the collapse of stocks in the 70s and subsequent periods of recovery. A large body of research [Greenwood and Jovanovic (2001), Hobijn and Jovanovic (2001), Laitner and Stolyarov (2003) and Peralta–Alva (2006)] elaborates on the effects of IT on the values of old and new companies. Mcgrattan and Prescott (2005) attribute fluctuations in stock values to changes in the tax system, whilst Hall (2001) attributes them to intangible investments. We will delve into this literature in Section 2 after discussing some empirical evidence. Of course, it will be instructive to check how these explanations for the behavior of stocks in the 70s may fare in some other time periods. An important consideration in our model is that asset prices incorporate the option value of technological innovations that have yet to be implemented. Hence, the value of a firm may differ from the book value of its durable factors of production.
We investigate the effect of paying students to complete 75 hours of studying at a monitored location over a five-week period. Students were recruited both from a large introductory class and from students in the regular experimental subject pool. In one treatment, the 75 hours of studying must be composed of at least 12 hours during the first week, at least 24 hours by the end of the second week, etc. In the second treatment, 75 hours of studying must be completed, but there were no weekly studying requirements. While our ex ante prediction was that imposing a weekly structure would help procrastinating students avoid getting too far behind, we instead find that a higher proportion of students achieve the 75-hour target in the time-unstructured treatment. The patterns of study time show a pronounced weekly cycle; remarkably, this pattern is almost identical for both treatments. While we cannot reject the models of quasi-hyperbolic discounting, these patterns seem more consistent with the notion of willpower. Finally, we find evidence that, over time, students who achieve the studying goal improve their performance in the introductory class relative to those students who did not.
People experience self-control problems when their preferences are not consistent across time. One form of self-control problem concerns persistent bad habits or addictions, such as overeating or cigarette smoking. An individual knows that he or she will later regret a current choice of self-indulgence, but nevertheless engages in the activity. The other side of the coin is a situation where an individual is faced with an activity that will lead to future benefits, but is unappealing at the moment. This often leads to procrastination, common in everyday life. People vow to stop smoking, stop eating ice cream, or start exercising tomorrow. Procrastination has been found to be quite pervasive among students: Ellis and Knaus (1977) find that 95% of college students procrastinate, while Solomon and Rothblum (1984) find that 46% nearly always or always procrastinate in writing a term paper.
The impact of the financial sector on the real economy is subtle and complex. What distinguishes financial institutions from other firms is the relatively small share of real assets on their balance sheets. Thus, the direct impact of financial institutions on the real economy is relatively minor. Nonetheless, the indirect impact of financial markets and institutions on economic performance is extraordinarily important. The financial sector mobilizes savings and allocates credit across space and time. It provides not only payment services, but more importantly products which enable firms and households to cope with economic uncertainties by hedging, pooling, sharing, and pricing risks. An efficient financial sector reduces the cost and risk of producing and trading goods and services and thus makes an important contribution to raising standards of living.
This paper examines the relationship between the financial sector and economic performance highlighting the role of government in maintaining an efficient financial system. It does so in several stages. In the first section, in order to provide a clear standard for comparison, we begin by considering how an economy would perform without a financial sector. In the second section, we proceed to introduce a simplified financial sector with direct financial transactions between savers and investors. We then introduce financial intermediaries which transform the direct obligations of investors into indirect obligations of financial intermediaries which have attributes that savers prefer. This section emphasizes how the financial sector can improve both the quantity and quality of real investment and thereby increase income per capita.
