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. We argue that financial market participants are unlikely to capture all the economic rents resulting from innovative activity, even when they own shares in innovating firms. This argument is based on two insights. First, investment opportunities are partly embodied in people -- in the form of new ideas, inventions or business plans. Consequently, part of the benefits from technological progress accrues to these innovators rather than to the shareholders in the firm. Second, while capital is typically tied to a specific technology, labor is more flexible, since workers have skills that are often transferable across technologies. We formalize these insights in a general equilibrium model, which we calibrate to the data. Our model reproduces key stylized facts about asset returns and the economy. We derive and test new predictions of our framework using a direct measure of innovation. The model's predictions are supported by the data.