Growth, innovation, credit constraints, and stock price bubbles

We study the potential for rational bubbles in the innovation sector to affect long term economic growth. We show that stock market prices of research and development (R&D) firms can include a bubble component when credit constraints are present. Bubbles are self-sustained in equilibrium by a “liquidity” premium that originates when credit constraints are relaxed. Bubbles expand the borrowing and production capacities of R&D firms, stimulate...