We study asset-pricing implications of innovation in a general-equilibrium overlappinggenerations 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 r...

In an exchange economy under uncertainty populated by multiple consumers, we how the heterogeneity in the individual consumers’ subjective beliefs affect the representative consumer’s utility function. We derive a formula that indicates that the more heterogeneous the individual consumers’ beliefs are, the higher probabilities the representative consumer’s belief attaches to extreme events that...

This paper studies the efficiency of competitive equilibria in economies where the expansion of investment is facilitated by securitization. We show that the use of securitization is generally associated with constrained inefficient aggregate investment, thereby justifying regulatory intervention in markets for securitized assets. We examine the effectiveness of three policy instruments to addr...

Wary consumers overlook gains but not losses in remote sets of dates or states. As preferences are upper but not lower Mackey semi-continuous, Bewley’s (1972) [4] result on existence of equilibrium whose prices are not necessarily countably additive holds. Wariness is related to lack of myopia and to ambiguity aversion (and, therefore, to Bewley’s (1986) [6] work on Knightian uncertainty). Wary...

In a continuous-time economy with complete markets, we show how the heterogeneity in the individual consumers’ risk attitudes and impatience would affect the representative consumer’s counterparts. Specifically, our formulas tell us how his risk tolerance and impatience will change over time, and how his impatience will be affected by the changes in aggregate consumption levels. Under the assum...

We propose structural models of investment for the econometric estimation of the real option markup. Count data models offer flexible specifications for bringing real option investment models to aggregate market data. The empirical results for oil tanker investment data are supportive for the proposed structural models, as well as the real option hypothesis. We find that the sensitivity of inve...