Finance in a Time of Disruptive Growth
Increased arrival of new technologies and displacement of old technologies leads to increased wealth re-distribution. Using a novel data set on the wealth of ultra-high net worth (UHNW) individuals, we show that a major reason for the recent increase in wealth inequality has been the the rapid ascension to wealth by self-made businesspeople in the last decades. We then build a model that encompasses lack of risk sharing between existing investors and also between existing investors and arriving entrepreneurs to study the implications of redistributive growth for wealth dynamics and portfolio choices of investors in a dynamic general equilibrium model. Consistent with the data, the model predicts that "alternative asset classes" as diverse as commercial real estate, commodities, and private equity become increasingly attractive in a world of increased displacement and experience inflows. The same applies to zero-net supply risk free investments, leading to a drop in the risk free rate. The output share of the financial industry increases, whereas (irreversible) and specialized investment in equipment and structures may not, despite the lower required rates of return. Surprisingly, the equilibrium features a positive gap between the expected returns of investments in emerging versus existing firms, despite the portfolio diversification benefits offered by the former.