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.
Partenaire de recherche
Paul Woolley Research Initiative
Thème de recherche
Contracts on Organisational Structure