Finance in a Time of Disruptive Growth

Increased arrival of new technologies and displacement of old technologies leads to increased heterogeneity of investment income across investors. Investors who find themselves with high exposures to successful new firms win a disproportionate share of profits, while those who hold lower exposures may end up with a lower fraction of aggregate investment income. Alternative asset classes as diverse as commercial real estate, commodities, and private equity offer hedging and diversification benefits in a world of increased displacement, and therefore experience increased inflows. The same applies to zero-net supply risk free investments, leading to a drop in the risk free rate. Surprisingly, and despite providing hedging benefits, there is a positive gap between the expected returns of privately and publicly traded assets, which narrows as the endogenously determined size of the financial industry increases.