We study an overlapping-generations economy in which new agents innovate and introduce new products and firms. Innovation is stochastic. The new firms increase overall productivity, but also steal business from pre-existing firms and act as depreciation shocks for the human capital of existing agents. Since new firms belong to newly arriving agents, innovations are a double-edged sword for pre-existing generations: Increased innovation activity increases the total output, but it also reduces the share of the pre-existing agents in the increased output. The latter effect --- "the displacement risk" --- makes agents reluctant to hold stock in firms whose output is exposed to increased innovation and competition by new firms, while giving a hedging value to firms that can profit from innovation. Therefore the model produces a value effect. At the aggregate level the displacement risk makes agents reluctant to hold stock of existing firms, since their profits are collectively at risk from new entrants. This leads to a higher equity premium. We calibrate the model so that it can match estimated cohort effects for individuals and firms, and evaluate its quantitative implications.
