Dimitris Papanikolaou

Dimitris Papanikolaou

John L. and Helen Kellogg Professor of Finance

Kellogg School of Management, Northwestern University 2211 Campus Dr, Office 4319, Evanston IL, 60208

Email | CV | Google Scholar

Working Papers

1. Who Bears the Cost of Aggregate Fluctuations and Why? (new)

(with Maarten Meeuwis, Lawrence Schmidt and Jonathan Rothbaum)

Higher discount rates lead to lower worker earnings for workers at the bottom of the income distribution; these declines are primarily driven by job separations. By contrast, lower cashflow (or productivity) news is followed by declines in earnings for workers in the top of the income distribution, with most of the effect coming from the intensive margin. We build an equilibrium model of labor market search that quantitatively replicates these facts. The model has several implications regarding the role of discount rates in generating unemployment fluctuations; the drivers of the low level of cyclicality of aggregate worker earnings; and the redistributive effects of business cycle fluctuations and monetary policy.

[Paper (ver 11/2022)]

2. Intangible Capital, Non-rivalry, and Growth (new)

(with Nicolas Crouzet, Janice Eberly, and Andrea Eisfeldt)

We provide an answer to why growth may slow even in the face of technological improvements. Our focus is on the role of intangible assets. Intangible assets are distinct from physical capital in that they are comprised by information that requires a storage medium. A reduction in replication costs for intangible assets enables them to be less rivalrous in use, stimulating growth. However, we show how limits to excludability create a countervailing force that limits growth. This paper subsumes the working paper A model of intangible capital.

[Paper (ver 10/2022)]

3. Technology, Vintage-Specific Human Capital, and Labor Displacement: Evidence from Linking Patents with Occupations

(with Leonid Kogan, Lawrence Schmidt and Bryan Seegmiller)

We construct occupation-specific indicators of technological change that span two centuries (1850-2010) using textual analysis of patent documents and occupation task descriptions. We find strong evidence that much of technical change has been displacive of labor during this period. Contrary to the standard SBTC model, high-payed workers experience relatively worse outcomes. We reconcile this fact with the standard model by allowing for skill displacement. Previously titled "Technological Change and Occupations over the Long Run"

[Paper (ver. 08/2022)] [Slides]

4. Technological Innovation and Labor Income Risk

(with Leonid Kogan, Lawrence Schmidt and Jae Song)

Using administrative data, we examine how labor income risk depends on innovation shocks.

[Paper (ver. 04/2021)] [Slides]

5. Evaluation and Learning in R&D Investment

(with Alex Frankel, Danielle Li and Joshua Krieger)

[Paper (ver. 12/2022)]


1. Measuring Document Similarity With Weighted Averages of Word Embeddings

(with Lawrence Schmidt and Bryan Seegmiller)

Explorations in Economic History, forthcoming

We propose a simple and computationally tractable methodology for computing similarity between two documents with applications.


2. The Economics of Intangible Capital

(with Nicolas Crouzet, Janice Eberly, and Andrea Eisfeldt)

Journal of Economic Perspectives, 2022, 36(3)

What makes intangibles distinct from physical capital? The key distinction is lack of physical presence which leads to two properties: non-rivalry and the need for a storage medium. We discuss these properties related them to existing views in the literature.


3. Intangible Value

(with Andrea Eisfeldt and Edward Kim)

Critical Finance Review, forthcoming

We propose a simple improvement to the Fama and French (1993) value factor that accounts for intangibles.

[Paper] [Data and Code]

4. Working Remotely and the Supply-side Impact of Covid-19

(with Lawrence Schmidt)

Review of Asset Pricing Studies, 2022, 12(1)

We analyze the supply-side disruptions associated with Covid-19 across firms and workers. To do so, we exploit differences in the ability of workers across industries to work remotely using data from the American Time Use Survey (ATUS).

[Paper] [Data]

5. Missing Novelty in Drug Development

(with Danielle Li and Joshua Krieger)

Review of Financial Studies, 2022, 35(2)

We construct a new measure of drug novelty. Novel drugs are riskier projects (they pass FDA approval with lower probability) but are more valuable than derivative drugs. We show that a plausibly exogenous cashflow shock to firms leads them to develop more novel drugs. Previously titled "Developing Novel Drugs".

Winner of the 2017 Red Rock Conference and 2018 LBS Summer Finance Symposium Best Paper Awards

[Paper] [Non-technical Summary]

6. Private and Social Returns to R&D: Drug Development and Demographics

(with Efraim Benmelech, Janice C. Eberly and Joshua Krieger)

American Economic Association, Papers and Proceedings, 2021

We document that a significant share of intangible investment is geared towards medical R&D targeting older patients.


7. Measuring Technological Innovation over the Long Run

(with Bryan Kelly, Amit Seru, and Matt Taddy)

American Economic Review: Insights, 2021, 3(3)

We use textual analysis to create new indicators of patent quality, which are available for the entire universe of patents issued by the USPTO over the 1840 to 2010 period. Our measure of patent quality is predictive of future citations and correlates strongly with measures of market value.

[Accepted Version] [Working Paper Version (has more results)] [Non-technical Summary] [Media Coverage] [Patent-level metrics][Time-Series data] [Complete Replication Kit at ICPSR] [Replication Kit at Github, includes data on citations and technology class [Pairwise Citation Data]

8. Trust, Collaboration, and Economic Growth

(with Jiro E. Kondo and Danielle Li)

Management Science, 2021, 67(3)

We propose a macroeconomic model in which variation in the level of trust leads to higher innovation, investment, and productivity growth. The key feature in the model is a hold-up friction in the creation of new capital. Innovators generate ideas but are inefficient at implementing them into productive capital on their own. Firms can help innovators implement their ideas efficiently, but cannot ex ante commit to compensating them appropriately. This paper is a significantly revised version of a previous paper titled, ``Cooperation cycles: A theory of endogenous investment-specific shocks.''


9. Left Behind: Creative Destruction, Inequality, and the Stock Market

(with Leonid Kogan and Noah Stoffman)

Journal of Political Economy, 2020, 128(3)

We develop a general equilibrium model of asset prices in which the benefits of technological innovation are distributed asymmetrically. Financial market participants do not capture all the economic rents resulting from innovative activity, even when they own shares in innovating firms. Economic gains from innovation accrue partly to the innovators, who cannot sell claims on the rents their future ideas will generate. The model implies that improvements in technology can lower households' indirect utility. The resulting hedging motives can give rise to a value premium. Previously titled: "Winners and Losers: Creative Destruction and the Stock Market"

[Paper] [Slides] [Web Appendix] [Erratum] [Non-technical Summary] [Data and Code]

10. Technological Innovation, Intangible Capital, and Asset Prices

(with Leonid Kogan)

Annual Review of Financial Economics, 2019, Vol 11, 221-242

We review research on the asset pricing implications of models with innovation and intangible capital.


11. Financial Frictions and Employment during the Great Depression

(with Efraim Benmelech and Carola Frydman)

Journal of Financial Economics, 2019, 133(3), 541-563

We document the response of firm-level employment to an exogenous shock to firm financing needs during the Great Depression.

[Paper] [Web Appendix]

12. Equilibrium Analysis of Asset Prices: Lessons from CIR and APT

(with Leonid Kogan)

Journal of Portfolio Management, 2018, Vol 44 (6) Special Issue Dedicated to Stephen A. Ross

Article is for a special issue of JPM in honor of Stephen Ross, who was one of my Ph.D. advisors. The article summarizes the intellectual contribution of the Cox-Ingersoll-Ross model, and the Arbitrage Pricing Theory (APT) on my own work, rather than a balanced and comprehensive literature review.


13. In Search of Ideas: Technological Innovation and Executive Pay Inequality

(with Carola Frydman)

Journal of Financial Economics, 2018, 130(1), 1-24

We build and estimate general equilibrium model of executive pay and firm growth. Executives add value to the firm not only by participating in production decisions, but also by identifying new investment opportunities.

[Paper] [Web Appendix] [Non-technical Summary]

14. Technological Innovation, Resource Allocation and Growth

(with Leonid Kogan, Amit Seru, and Noah Stoffman)

Quarterly Journal of Economics, 2017, 132(2), 665-712

We construct a measure of innovation combining data on patents and stock returns. We weigh patents by the stock market reaction of firms to which the patent is granted.

Winner of Crowell Memorial Prize (second place), Panagora Asset Management

[Paper] [Web Appendix] [Replication Kit] [Data, updated to 2019]

15. Adverse Selection, Slow Moving Capital and Misallocation

(*with Brett Green and Willie Fuchs)

Journal of Financial Economics, 2016 120(2)

We incorporate an informational asymmetry in a macro model. Adverse selection leads to slow moving capital, lagged investment and persistent misallocation of resources. The model generates a rich set of dynamics and provides a micro-foundation for convex adjustment costs.


16. Long-run Bulls and Bears

(*with Rui Albuquerque, Martin Eichenbaum, and Sergio Rebelo)

Journal of Monetary Economics, 2015, 76(S)

A central challenge in asset pricing is the weak connection between stock returns and observable economic fundamentals. We provide evidence that this connection is stronger than previously thought.


17. Financial Relationships and the Limits to Arbitrage

(with Jiro E. Kondo)

Review of Finance, 2015, 19(6)

Arbitrage ideas are difficult to finance because they can be stolen by the lender. In a repeated game, limited commitment by financiers leads to underinvestment in the best ideas. Our model generates endogenous limits to arbitrage.


18. The Value and Ownership of Intangible Capital

(with Andrea Eisfeldt)

American Economic Review, Papers and Proceedings, May 2014, 104(5)

Imputing intangible capital from market values misses the value of capital that is embodied in key labor inputs. Importantly, the value omitted varies with the state of the economy.


19. Portfolio Choice with Illiquid Assets

(with Andrew Ang and Mark Westerfield)

Management Science, 2014, 60(11)

We model illiquidity risk as the random arrival of trading opportunities. Illiquidity risk has a substantially larger effect on utility and portfolio policies than illiquidity that is deterministic. We extend the model to incorporate infrequent illiquidity crisis and characterize the illiquidity risk premium. Illiquidity risk leads to limited arbitrage even in normal times.

Winner of the 2011 Roger F Murray Prize (Second Prize), Q Group


20. Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks

(with Leonid Kogan)

Review of Financial Studies, 2013, 26(11)

A number of existing cross-sectional anomalies - investment, Q, profitability, idiosyncratic volatility, and market beta share a common explanation. These characteristics are correlated with the share of growth opportunities to firm value and thus with firms' exposures to capital-embodied shocks.

[Paper (corrects minor errors in published version)] [Web Appendix]

21. Growth Opportunities, Technology Shocks and Asset Prices

(with Leonid Kogan)

Journal of Finance, April 2014, 69(2)

Firms' beta with a portfolio of investment minus consumption good producers is correlated with the share of growth opportunities to firm value. Value and growth firms vary in their share of growth opportunities to firm value, and hence in their exposure to capital-embodied shocks. The model generates the value premium, the value factor, and the failure of the CAPM in the data.

Winner of the 2014 Amundi Smith Breeden Prize (First Prize)

[Paper (corrects minor errors in published version)] [Web Appendix]

22. Organization Capital and the Cross-Section of Expected Returns

(with Andrea Eisfeldt)

Journal of Finance, August 2013, 68(4)

Key talent and shareholders share the rents from organization capital. This sharing rule is stochastic, as it depends on the managers' outside option, which itself is a function of the investment opportunities in the economy. From shareholders' perspective, organization capital is exposed to additional risks, hence firms' with more organization capital have higher risk premia.

Winner of the 2013 Amundi Smith Breeden Prize (First Prize)

[Paper] [Web Appendix] [Replication Kit and Extended Data]

23. Economic Activity of Firms and Asset Prices

(with Leonid Kogan)

Annual Review of Financial Economics, 2012, Vol 4, 361-384

A survey of the literature on asset pricing models where production is modeled explicitly.


24. Investment, Idiosyncratic Risk, and Ownership

(with Vasia Panousi)

Journal of Finance, June 2012, 67(3)

Managers typically own undiversified stakes in firms for incentive reasons. Managers' exposure to idiosyncratic risk affects their optimal investment decisions.

[Paper] [Web Appendix]

25. Investment Shocks and Asset Prices

Journal of Political Economy, August 2011, 119(4)

Capital embodied technology shocks lead to high marginal utility states, as investors substitute consumption for investment. Stock returns of firms producing investment and consumption goods help infer realizations of capital-embodied shocks in the data.

[Paper] [Web Appendix] [Data and Code]

26. Growth Opportunities and Technology Shocks

(with Leonid Kogan)

American Economic Review, Papers and Proceedings, May 2010, 100(2), 532-536

Firms' beta with a portfolio of investment minus consumption good producers is correlated with the share of growth opportunities to firm value.


Older Working Papers (on indefinite hold)

1. Sources of Systematic Risk

(with Igor Makarov)

Winner of Crowell Memorial Prize (second place), Panagora Asset Management


2. Drifting apart: The pricing of assets when the benefits of growth are not shared equally

(with Nicolae Garleanu, Stavros Panageas, and Jianfeng Yu)