The Role of Owned Ideas in Stock Market Run-ups∗

During the late 1990s the market value of businesses grew at 15% per year. It is hard to reconcile such fast growth with the observed rates of investment in physical capital and R&D. We therefore propose a model in which new ideas are privately owned, but discovering them does not require resources. In our model it is possible that market value rises very rapidly without drastic changes in factor prices or resource allocation. We examine possible scenarios for the rapid market run-up of the 1990s, including optimistic assessment of future productivity growth, a shift in the innovation process and a change in patent policy. At this point, plausible changes can explain no more than a third of the observed 1995-99 market run-up. This exercise suggests a method of testing for stock market bubbles. JEL codes O16, O41, O34