The Demographics of Innovation and Asset Returns

Nicolae Garleanu (), Leonid Kogan () and Stavros Panagaeas ()
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Nicolae Garleanu: University of California, Berkeley - Haas School of Business
Leonid Kogan: Massachusetts Institute of Technology (MIT) - Sloan School of Management
Stavros Panagaeas: University of Chicago - Booth School of Business

No 2009-008, Working Papers from Becker Friedman Institute for Research In Economics

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 misplacement risk using estimates of inter-cohort consumption differences across households and find support for the model.

Date: 2009-09
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