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The Demographics of Innovation and Asset Returns

  • Nicolae Garleanu

    ()

    (University of California, Berkeley Haas School of Business)

  • Leonid Kogan

    ()

    (Massachusetts Institute of Technology)

  • Stavros Panageas

    (University of Chicago Booth School of Business)

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.

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Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2009-008.

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Date of creation: 2009
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Handle: RePEc:bfi:wpaper:2009-008
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