Taxing Capital? Not a Bad Idea After All!

Dirk Krueger (), Hanno Lustig () and Fabrizio Perri ()
Additional contact information
Hanno Lustig: University of California Los Angeles and NBER, http://www.econ.ucla.edu/people/faculty/Lustig.html
Fabrizio Perri: University of Minnesota, Federal Reserve Bank of Minneapolis, CEPR and NBER, http://www.econ.umn.edu/faculty/perri/index06.html

No 2006/22, CFS Working Paper Series from Center for Financial Studies

Abstract: We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of the limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints in that state of the world. These unconstrained households have lower consumption growth rates than constrained households, i.e. they are located in the lower tail of the crosssectional consumption growth distribution. We use household consumption data from the U.S. Consumer Expenditure Survey to estimate the pricing kernel implied by the model and to evaluate its performance in pricing aggregate risk. We employ the same data to construct aggregate consumption and to derive the standard complete markets pricing kernel. We find that the limited enforcement pricing kernel generates a market price of risk that is substantially larger than the standard complete markets asset pricing kernel.

Keywords: Limited Commitment; Equity Premium; Stochastic Discount Factor; Household Consumption Data (search for similar items in EconPapers)
JEL-codes: G12 D53 D52 E44 (search for similar items in EconPapers)
Date: 2006-10-06
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Related works:
Working Paper: Taxing Capital? Not a Bad Idea After All! (2007)
Working Paper: Taxing Capital? Not a Bad Idea After All! (2006)
Working Paper: Taxing Capital? Not a Bad Idea After All! (2006)
Working Paper: Taxing Capital: Not a Bad Idea After All (2004)
Journal Article: Taxing Capital? Not a Bad Idea after All! (2009)
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