Was there too little entry during the Dot Com Era?

With Brent Goldfarb and David Kirsch

Published in the Journal of Financial Economics, 86(1):100-144, October 2007

Abstract: We present four stylized facts about the Dot Com Era: (1) there was a widespread belief in a "Get Big Fast" business strategy; (2) the increase and decrease in public and private equity investment was most prominent in the internet and information technology sectors; (3) the survival rate of dot com firms is on par or higher than other emerging industries; and (4) firm survival is independent of private equity funding. To connect these findings we offer a herding model that accommodates a divergence between the information and incentives of venture capitalists and their investors. A Get Big Fast belief cascade may have led to overly focused investment in too few internet startups and, as a result, too little entry.

Covered by The New York Times (Leslie Berlin, "Lessons of survival from the Dot-Com attic," p. BU4, 11/23/2008)

Covered by The Wall Street Journal (Lee Gomes, "The Dot-Com Bubble is reconsidered—and maybe relived," p. B1, 11/8/2006)

Covered by Inc.com (Leslie Taylor, "The dot-com bust? Not as bad as you think," 12/4/2006)

Published article (ScienceDirect subscribers only)

Working paper 12/13/2005 (older version but freely distributable)

Efficiency in repeated trade with hidden valuations

With Susan Athey

Published in Theoretical Economics, 2(3):299-354, September 2007

Abstract: We analyze the extent to which efficient trade is possible in an ongoing relationship between impatient agents with hidden valuations (i.i.d. over time), restricting attention to equilibria that satisfy ex post incentive constraints in each period. With ex ante budget balance, efficient trade can be supported in each period if the discount factor is at least one half. In contrast, when the budget must balance ex post, efficiency is not attainable, and furthermore for a wide range of probability distributions over their valuations, the traders can do no better than employing a posted price mechanism in each period. Between these extremes, we consider a "bank" that allows the traders to accumulate budget imbalances over time, but only within a bounded range. We construct non-stationary equilibria that allow traders to receive payoffs that approach efficiency as their discount factor approaches one, while the bank earns exactly zero expected profits. For some probability distributions there exist equilibria that yield exactly efficient payoffs for the players and zero profits for the bank, but such equilibria require high discount factors.

Published article (free access)