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Heterogeneous Innovation, Firm Creation and Destruction, and Asset Prices

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  • Jan Bena
  • Lorenzo Garlappi
  • Patrick Grüning

Abstract

We study the implications of creative destruction on asset prices. We develop a general equilibrium model of endogenous firm creation and destruction in which “incremental” innovation by incumbents and “radical” innovation by entrants drive productivity improvements. Firms’ incentives to innovate generate time-varying economic growth and countercyclical economic uncertainty. The model matches key properties of consumption and asset prices, as well as novel facts on the process of creative destruction in the United States obtained using a sample of patents from 1975–2013. We show that the interplay between incumbents and entrants is an important determinant of risks priced in the financial markets.Received June 2, 2014; accepted September 14, 2015 by Editor Wayne Ferson.

Suggested Citation

  • Jan Bena & Lorenzo Garlappi & Patrick Grüning, 2016. "Heterogeneous Innovation, Firm Creation and Destruction, and Asset Prices," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 6(1), pages 46-87.
    • Handle: RePEc:oup:rasset:v:6:y:2016:i:1:p:46-87.
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    File URL: http://hdl.handle.net/10.1093/rapstu/rav010
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    Cited by:

    1. Grüning, Patrick, 2018. "Heterogeneity in the internationalization of R&D: Implications for anomalies in finance and macroeconomics," Finance Research Letters, Elsevier, vol. 26(C), pages 132-138.
    2. Donadelli, Michael & Grüning, Patrick & Jüppner, Marcus & Kizys, Renatas, 2021. "Global temperature, R&D expenditure, and growth," Energy Economics, Elsevier, vol. 104(C).
    3. Grüning, Patrick, 2017. "International endogenous growth, macro anomalies, and asset prices," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 118-148.
    4. Donadelli, Michael & Grüning, Patrick, 2021. "Innovation dynamics and fiscal policy: Implications for growth, asset prices, and welfare," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    5. Giuliano Curatola & Michael Donadelli & Patrick Grüning, 2022. "Technology trade with asymmetric tax regimes and heterogeneous labour markets: Implications for macro quantities and asset prices," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 3805-3831, October.
    6. Garlappi, Lorenzo & Song, Zhongzhi, 2017. "Capital utilization, market power, and the pricing of investment shocks," Journal of Financial Economics, Elsevier, vol. 126(3), pages 447-470.
    7. Aydoğan Alti & Sheridan Titman, 2019. "A Dynamic Model of Characteristic-Based Return Predictability," NBER Working Papers 25777, National Bureau of Economic Research, Inc.

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