Essays on investment, innovation and productivity growth

Investment in developing new technologies is a key determinant of aggregate productivity growth and improvements in living standards. This dissertation addresses various aspects of the emergence of new technologies and the information problem intrinsic to investing in their development. First, in the context of an innovation-based growth model, it studies how imperfect information on fundamentals causes investment booms and crashes that coincide with the spread of new technologies at the frontier. Second, the research quantifies the effect of changes in the quality of information on investment, aggregate growth and volatility. Analytic results and a numerical simulation show that more informative signals about the fundamentals raise volatility while lowering average growth. Third, the dissertation studies the effects of stock market valuation on research investment, the rate of innovation and the growth rate of labor productivity. In the presence of financing constraints for R&D investment, episodes of high market valuation can ease these constraints and raise the economy-wide investment in R&D and the rate of innovation. A Schumpeterian-style growth model with a costly financial intermediation process is developed to characterize the relationship between market value, entry of new firms and the aggregate rate of innovation. The model is used to measure the welfare consequences of a stock market run-up that may only partly be justified by fundamentals. In a calibration of the model to the NASDAQ bubble of the 1990s, the effects of the episode on output growth and welfare are assessed. With an acceleration in US trend productivity growth from a pre-1995 rate of 1.4% to a rate of 1.7% per annum, the welfare benefits and costs of the NASDAQ boom just cancel out. If the new growth rate is as high as 3%,the bubble resulted in a net gain of 1.2% of the present discounted value of consumption. The dissertation proposes a novel method for modeling investor expectations of future returns to innovation and incorporates the frictions that prevail in the financing of research into a quality ladder growth framework in a tractable way.