Technology adoption, bubbles and productivity

Can stock market bubbles accelerate long term growth? Do such bubbles indicate irrational behavior? This paper studies the effect of innovation uncertainty on the concomitant time path of firm valuations, technology adoption and growth in a setting that incorporates positive network externalities. In such a setting a bubble may form under rational expectations. The resulting valuation bubble, induced by uncertainty and accelerated by positive externalities, may serve as a coordination mechanism supporting accelerated post-bubble growth. Such a path may compensate for the inability of market participants to internalized and exploit the full potential of positive externalities. It may also overcome the chilling effects often attributed to the adoption process of externality intensive innovations. Under the framework proposed, uncertainty may improve long-term growth. This setup may also be used to explain the accelerated productivity that followed the bursting of notable technology related bubbles such as the railway bubble of 19th century England and the 20th century ICT bubble. Attributing a productive role to certain bubbles may have far-reaching policy implications