Working Paper: NBER ID: w15457
Authors: Nicolae Grleanu; Leonid Kogan; Stavros Panageas
Abstract: We study asset-pricing implications of innovation in a general-equilibrium overlapping-generations economy. Innovation increases the competitive pressure on existing firms and workers, reducing the profits of existing firms and eroding the human capital of older workers. Due to the lack of inter-generational risk sharing, innovation creates a systematic risk factor, which we call "displacement risk.'' This risk helps explain several empirical patterns, including the existence of the growth-value factor in returns, the value premium, and the high equity premium. We assess the magnitude of displacement risk using estimates of inter-cohort consumption differences across households and find support for the model.
Keywords: Innovation; Asset Pricing; Displacement Risk; Value Premium; Equity Premium
JEL Codes: G10; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| innovation (O35) | competitive pressure (L11) |
| competitive pressure (L11) | profits (L21) |
| profits (L21) | erosion of human capital (J24) |
| innovation (O35) | displacement risk (J63) |
| displacement risk (J63) | asset returns (G19) |
| innovation (O35) | consumption of existing agents (E21) |
| innovation (O35) | competition (L13) |
| competition (L13) | equity premium (G12) |
| innovation (O35) | value premium in stock returns (G12) |
| more innovative firms (O31) | lower average returns (G19) |
| intergenerational consumption differences (D15) | return differences (F12) |