Wealth Inequality and Asset Pricing

Christian Gollier ()

The Review of Economic Studies, 2001, vol. 68, issue 1, 181-203

Abstract: In an Arrow-Debreu exchange economy with identical agents except for their initial endowment, we examine how wealth inequality affects the equilibrium level of the equity premium and the risk-free rate. We first show that wealth inequality raises the equity premium if and only if the inverse of absolute risk aversion is concave in wealth. We then show that the equilibrium risk-free rate is reduced by wealth inequality if the inverse of the coefficient of absolute prudence is concave. We also prove that the combination of a small uninsurable background risk with wealth inequality biases asset pricing towards a larger equity premium and a smaller risk-free rate.

Date: 2001
References: Add references at CitEc
Citations: View citations in EconPapers (56)

Downloads: (external link)
http://hdl.handle.net/10.1111/1467-937X.00165 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Wealth Inequality and Asset Pricing (1997)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:68:y:2001:i:1:p:181-203.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().