The Risks of Schumpeterian Competition

In a game-theoretic model where agents compete for claims to a consumption stream, we characterize how creative destruction affects risk, wealth, and prices. Overinvestment not only imposes excessive disruption risk on existing assets and higher technological uncertainty, it also increases the duration of the consumption stream (the weighted-average maturity of wealth). Because of hedging motives, wealth duration and uncertainty decrease systematic risk. If rent seeking and competition are sufficiently high, a negative risk premium arises that resolves over time with learning. The model generates price-paths consistent with boom-bust patterns and predictive regressions document negative expected excess returns when rent seeking and competition are intense