Technological Innovation: Winners and Losers∗

We analyze the effect of innovation on asset prices in a tractable, general equilibrium framework with heterogeneous households and firms. Innovation has a heterogenous impact on households and firms. Technological improvements embodied in new capital benefit workers, while displacing existing firms and their shareholders. This displacement process is uneven: newer generations of shareholders benefit at the expense of existing cohorts; and firms well positioned to take advantage of these opportunities benefit at the expense of firms unable to do so. Under standard preference parameters, the risk premium associated with innovation is negative. Our model delivers several stylized facts about asset returns, consumption and labor income. We derive and test new predictions of our framework using a direct measure of innovation. The model’s predictions are supported by the data. ∗We thank Hengjie Ai, Kent Daniel, Carola Frydman, Lars Hansen, Camelia Kuhnen, Martin Lettau, Erik Loualiche, Deborah Lucas, Monika Piazzesi, Amit Seru, Martin Schneider, Adrien Verdelhan, Annette Vissing-Jorgensen, Amir Yaron, and the seminar participants at Berkeley Haas, Boston University, CITE, Columbia GSB, University of Indiana, Jackson Hole Finance Conference, LBS, LSE, MIT Sloan, NBER Asset Pricing, Northwestern University, Washington University for valuable discussions and comments. Dimitris Papanikolaou thanks the Zell Center for Risk and the Jerome Kenney Fund for financial support. Leonid Kogan thanks J.P. Morgan for financial support. †MIT Sloan School of Management and NBER, [email protected] ‡Kellogg School of Management and NBER, [email protected] §Kelley School of Business, [email protected]