Optimal learning and new technology bubbles

Research output: Contribution to journalArticlepeer-review


It is widely believed that there is a fundamental linkage between major technological innovations, speculative fever, and wasteful overinvestment. This paper presents an equilibrium model of investment in a new industry, whose return-to-scale is not known in advance. Overinvestment relative to the full-information case is then optimal as the most efficient way to learn about the new technology. Moreover, the initial overinvestment is accompanied by apparently inflated stock prices and apparently negative expected excess returns in the new industry, which are also fully rational. This suggests a new interpretation of what seems to be stock market driven real bubbles.

Original languageEnglish (US)
Pages (from-to)2486-2511
Number of pages26
JournalJournal of Monetary Economics
Issue number8
StatePublished - Nov 2007
Externally publishedYes


  • Adaptive control
  • Bubbles
  • Investment
  • Learning
  • New technology

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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