Investment options and the business cycle

  title={Investment options and the business cycle},
  author={Boyan Jovanovic},
  journal={J. Economic Theory},
This paper extends Lucas (1978) to a production economy with two capital goods. It is an RBC model in which each unit of investment requires a new idea, an "option". When options are scarce, new capital is harder to put in place and the value of old capital rises. Thus the stock market and Tobin?s Q are negative indexes of intangibles. During a boom, Q rises gradually, as options are used up. Because investment represents an exercise of options, it has an intertemporal substitution tradeoff… CONTINUE READING


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