Left Behind: Creative Destruction, Inequality, and the Stock Market

Abstract

We develop a general equilibrium model of asset prices in which benefits of technological innovation are distributed asymmetrically. Financial market participants do not capture all economic gains from innovation even when they own shares in innovating firms. Such gains accrue partly to the innovators, who cannot sell claims on proceeds from their future ideas. We show how the resulting inequality among agents can give rise to a high risk premium on the aggregate stock market, return comovement and average return differences among firms, and the failure of traditional representative-agent asset pricing models to account for cross-sectional differences in risk premia. * Earlier versions of this paper circulated under the titles "Technological Innovation: Winners and Losers," and "Winners and Losers: Creative Destruction and the Stock Market." We thank

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