Asset Pricing with Concentrated Ownership of Capital and Distribution Shocks
Forthcoming in American Economic Journal – Macroeconomics
+ abstract
This paper develops a production-based asset pricing model with two types of agents and concentrated ownership of physical capital. A temporary but persistent “distribution shock” causes the income share of capital owners to fluctuate in a procyclical manner, consistent with U.S. data. The concentrated ownership model significantly magnifies the equity risk premium relative to a representative-agent model because the capital owners’ consumption is more-strongly linked to volatile dividends from equity. With a steady-state risk aversion coefficient around 4, the model delivers an unlevered equity premium of 3.9 percent relative to short-term bonds and a premium of 1.2 percent relative to long-term bonds.
Keywords: Asset Pricing, Equity Premium, Term Premium, Distribution Shocks, Income
Inequality.
JEL Classi
cation: E25, E32, E44, G12, O40.