Schumpeterian Competition in a Lucas Economy

65 Pages Posted: 21 Nov 2017 Last revised: 15 Mar 2022

See all articles by Daniel Andrei

Daniel Andrei

McGill University; Desautels Faculty of Management

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: March 15, 2022

Abstract

We model a rent-seeking game where agents experiment with a new technology and compete for claims to a consumption stream. We characterize how creative destruction affects risk, wealth, and asset prices. Competition not only imposes excessive disruption risk on existing assets and higher technological uncertainty, it also increases the wealth duration (the weighted-average maturity of wealth). Because of hedging motives, a complementarity between wealth duration and technological uncertainty decreases systematic risk. If competition is sufficiently intense, a negative risk premium may arise. The model generates price paths consistent with boom-bust patterns and transient episodes of negative expected excess returns. We show that Schumpeterian competition may worsen income inequality.

Keywords: Schumpeterian Competition; Experimentation; Tullock contests; Creative Destruction; Return Predictability; Income Inequality.

JEL Classification: G11, G12, G14, L13, O33.

Suggested Citation

Andrei, Daniel and Carlin, Bruce I., Schumpeterian Competition in a Lucas Economy (March 15, 2022). Available at SSRN: https://ssrn.com/abstract=3073436 or http://dx.doi.org/10.2139/ssrn.3073436

Daniel Andrei (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Desautels Faculty of Management ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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