Reference

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.

Abstract

We study the dynamics of an innovative industry when agents learn about its strength, i.e., the likelihood that it gets hit by negative shocks. Managers can exert risk-–prevention export to mitigate the consequences of such shocks. As time goes by, if no shock occurs, con…dence improves. This attracts managers to the innovative sector. But, when con…dence becomes high, less managers exerting low risk–-prevention export also enter. This accelerates the growth of the industry, while inducing a decline in risk-–prevention. The longer the boom, the stronger the con…dence, the larger the losses if a shock occurs. While the above dynamics arise in the fi…rst best, with asymmetric information there is excessive entry of inefficient managers, earning informational rents at the expense of inneficient managers. This infl‡ates the innovative sector and increases its vulnerability.

Research partnership

Paul Woolley Research Initiative

Research theme

Contracts on Organisational Structure

Replaces

Bruno Biais, Jean-Charles Rochet, and Paul Woolley, The dynamics of innovation and risk, IDEI Working Paper, n. 807, October 2013.