A model characterizes the optimal r&d policy in a setting where innovations lead to an increase in profits and the probability of innovation increases with the knowledge stock. Simulated method of moments estimation identifies the structural parameters using data on profits, firm values and r&d...

not allow the probabilities of rare disasters to vary over time. Rather, Gabaix assumes that the degree of the response of dividends to a consumption disaster varies over time; it is this variability that drives volatility in his model. This sharply contrasts with the driving force of stock...