Heterogeneous Innovations, Firm Creation and Destruction, and Asset Prices

54 Pages Posted: 12 Mar 2015 Last revised: 25 Sep 2015

See all articles by Jan Bena

Jan Bena

University of British Columbia - Sauder School of Business

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business

Patrick Grüning

Bank of Lithuania - Center of Excellence for Finance and Economic Research (CEFER); Vilnius University - Faculty of Economics and Business Administration; Research Center SAFE

Date Written: September 11, 2015

Abstract

We study the implications of the creative destruction lifecycle of innovation for asset prices. We develop a general equilibrium model of endogenous firm creation and destruction where 'incremental' innovations by incumbents and 'radical' innovations by entrants drive productivity improvements. Micro-founded incentives of firms to innovate lead to the joint equilibrium determination of time-varying economic growth and countercyclical economic uncertainty. The model quantitatively matches key properties of consumption and asset prices, as well as novel stylized facts on the process of creative destruction in the U.S. economy obtained using a comprehensive sample of patents over the 1975-2013 period. We show that the interplay between incumbents' and entrants' innovations, which is at the core of creative destruction, is an important determinant of risks that are priced in financial markets.

Keywords: Economic uncertainty, Creative destruction, Innovation, Firm entry, Long-run risk

JEL Classification: E22, G12, O30, O41

Suggested Citation

Bena, Jan and Garlappi, Lorenzo and Grüning, Patrick, Heterogeneous Innovations, Firm Creation and Destruction, and Asset Prices (September 11, 2015). Available at SSRN: https://ssrn.com/abstract=2574952 or http://dx.doi.org/10.2139/ssrn.2574952

Jan Bena (Contact Author)

University of British Columbia - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
+1 604 822 8490 (Phone)

HOME PAGE: http://www.janbena.com

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Patrick Grüning

Bank of Lithuania - Center of Excellence for Finance and Economic Research (CEFER) ( email )

Totoriu g. 4
Vilnius, LT-01121
Lithuania
+370 5 2680 069 (Phone)

HOME PAGE: http://www.lb.lt/en/dr-patrick-gruning

Vilnius University - Faculty of Economics and Business Administration ( email )

Sauletekio al. 9 (II building)
Vilnius, LT-10222
Lithuania

HOME PAGE: http://www.evaf.vu.lt/en/

Research Center SAFE ( email )

Goethe University Frankfurt
Theodor-W.-Adorno Platz 3
Frankfurt am Main, D-60629
Germany

HOME PAGE: http://safe-frankfurt.de/research/researchers/researchers-details/showauthor/92-gruening.html

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