Reference

Bruno Biais, Jean-Charles Rochet, and Paul Woolley, The dynamics of innovation and risk, TSE Working Paper, n. 13-448, October 2013.

Abstract

We study the dynamics of an innovative industry when agents learn about the likelihood of negative shocks. Managers can exert risk-prevention effort to mitigate the consequences of shocks. If no shock occurs, confidence improves, attracting managers to the innovative sector. But, when condence becomes high, inefficient managers exerting low risk-prevention effort also enter. This stimulates growth, while reducing risk-prevention. The longer the boom, the larger the losses if a shock occurs. While these dynamics arise in the first-best, asymmetric information generates excessive entry of inefficient managers, earning informational rents, inflating the innovative sector and increasing its vulnerability.

Bruno Biais, Jean-Charles Rochet, and Paul Woolley, The dynamics of innovation and risk, The Review of Financial Studies, vol. 28, n. 5, 2015, pp. 1353–1380.