NANCY Seminar – Lucie MÉNAGER (Paris 2)

Event details :

Title: Racing with a rearview mirror: Output lag and investment dynamics

Abstract: We analyze a dynamic investment model in which short-lived agents sequentially decide how much to invest in a project of uncertain feasibility. The outcome of the project (success/failure) is not immediate but occurs after a fixed lag. We characterize the unique equilibrium and show that, in contrast with the case without lag, the unique equilibrium dynamics is not in threshold. If the initial belief is relatively high, investment decreases monotonically as agents become more pessimistic about the feasibility of the innovation. Otherwise, investment is not monotonic in the public belief or time: players alternate periods of no investment and periods of positive, decreasing investment. We thus identify a novel economic force that drives fluctuations in R&D spending, which is due to the output lag in the innovation process. We show that fluctuations also occur when the lag is stochastic, uncertain or when agents also decide when to invest.