Owned Ideas and the Stock Market∗

During the late 1990s the market value of U.S. businesses grew at 15% per year. It is hard to reconcile such fast growth with 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. In this context, we examine possible scenarios for the 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. We find that a plausible technology or policy shock that makes current and future innovations highly complementary can rationalize most of the observed market appreciation — although the corresponding longterm changes in the economy’s division of national income would be substantial. JEL codes O16, O41, O34