Investor beliefs about transformative innovations under uncertainty
Journal
Economica
Type
journal article
Date Issued
2023-07-12
Author(s)
Abstract
Modern economies sometimes produce potentially transformative innovations whose development and implementation involves large amounts of capital. Often, the required initial investments are fraught with uncertainty, and there is a scarcity of objective information that would help interested investors to predict success. How, in this situation, do investors form subjective beliefs about prospective returns? This paper explores the role of competing, specialized financial intermediaries that are incentivized to steer capital either towards or away from a potentially transformative innovation. We develop a model in which investors' subjective beliefs arise from a competitive campaign game, or belief contest, between two financial intermediaries. We discuss how a financial regulator—who does not possess superior information—may influence the contest outcome in favour of impartial beliefs, away from exuberant or overly pessimistic ones.
Language
English
Volume
90
Number
360
Start page
1119
End page
1144