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The Demographics of Innovation and Asset Returns

Author

Listed:
  • Stavros Panageas

    (Univ. of Chicago and NBER)

  • Leonid Kogan

    (MIT and NBER)

  • Nicolae Garleanu

    (UC Berkeley, NBER and CEPR)

Abstract

We study an overlapping-generations economy in which new agents innovate and introduce new products and firms. Innovation is stochastic. The new firms increase overall productivity, but also steal business from pre-existing firms and act as depreciation shocks for the human capital of existing agents. Since new firms belong to newly arriving agents, innovations are a double-edged sword for pre-existing generations: Increased innovation activity increases the total output, but it also reduces the share of the pre-existing agents in the increased output. The latter effect --- "the displacement risk" --- makes agents reluctant to hold stock in firms whose output is exposed to increased innovation and competition by new firms, while giving a hedging value to firms that can profit from innovation. Therefore the model produces a value effect. At the aggregate level the displacement risk makes agents reluctant to hold stock of existing firms, since their profits are collectively at risk from new entrants. This leads to a higher equity premium. We calibrate the model so that it can match estimated cohort effects for individuals and firms, and evaluate its quantitative implications.

Suggested Citation

  • Stavros Panageas & Leonid Kogan & Nicolae Garleanu, 2009. "The Demographics of Innovation and Asset Returns," 2009 Meeting Papers 140, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:140
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    2. Li, Xiaogang, 2020. "Innovation, market valuations, policy uncertainty and trade: Theory and evidence," ISU General Staff Papers 202001010800009179, Iowa State University, Department of Economics.
    3. Lustig, Hanno & Syverson, Chad & Van Nieuwerburgh, Stijn, 2011. "Technological change and the growing inequality in managerial compensation," Journal of Financial Economics, Elsevier, vol. 99(3), pages 601-627, March.
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    5. Ryo Jinnai, 2015. "Innovation, Product Cycle, and Asset Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 484-504, July.

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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