The Information-Technology Revolution and the Stock Market Jeremy Greenwood and Boyan Jovanic AER 1999 A simple model ( a la Lucas 1978)
Simple exchange economy: many infinitely lived agents, and equally many “trees”, each tree yielding a “dividend” (output that goes to the owner) of dt at each period t.
The (stock market) price of a tree at time zero:
Notice that P0 is also the ratio: stock market value/output (S/GDP) since output=1.
News arrive at t=0 that a fraction x of existing trees will die at date T, and will be replaced by equally many better trees, yielding an output of 1+z. Thus output from T on will be:
Output over time is therefore,
The new trees will not trade in the stock market until they actually appear at T.
Type-1 tree – dies at T, liquidation value of zero; before T its price is,
Type-2 tree – lives forever. It stock market value:
Hence if x goes up, overall market value goes down.
At date T new trees pop up and start to be traded. Output per tree, hence also consumption and dividends rise permanently to (1 + xz). Hence,
S falls faster than GDP in phase 1, but starts recovering before phase 2
“old tree” firms
The 1968 incumbents did badly, entrants did very well ~ 20 years later
IBM, Burroughs, Honeywell, NCR, Sperry Rand, DEC, Data General
Apple, Compaq, Dell, Gateway, Microsoft, Novel, Oracle, AOL, Yahoo, etc.