Working Paper: NBER ID: w23455
Authors: Daniel Andrei; Bruce I. Carlin
Abstract: Creative destruction not only involves bringing new technology to market, it imposes higher risk on the future of existing assets. We characterize the asset pricing implications of creative destruction when investors compete for market share. Compared to the social optimum, the quest for oligopoly rents leads to over-investment in uncertain projects, spikes in asset prices and risk premia, and an aftermath in which prices fall steeply as uncertainty resolves. These pricing patterns resemble a bubble ex post, but arise solely from competitive behavior and do not require information asymmetry, behavioral biases, or financial frictions. Our analysis yields novel empirical predictions and we discuss how financial innovation might be used to predict bubbles ex ante.
Keywords: Asset Pricing; Creative Destruction; Market Competition
JEL Codes: G12; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competitive behavior (L13) | overinvestment (G31) |
| overinvestment (G31) | asset prices (G19) |
| resolution of uncertainty (D80) | asset prices (G19) |
| competitive behavior (L13) | asset prices (G19) |