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Asset Pricing with Heterogeneous Consumers

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  • Constantinides, George M
  • Duffie, Darrell

Abstract

Empirical difficulties encountered by representative-consumer models are resolved in an economy with heterogeneity in the form of uninsurable, persistent, and heteroscedastic labor income shocks. Given the joint process of arbitrage-free labor prices, dividends, and aggregate income satisfying a certain joint restriction, it is shown that this process is supported in the equilibrium of an economy with judiciously modeled income heterogeneity. The Euler equations of consumption in a representative-agent economy are replaced by a set of Euler equations that depend not only on the per capita consumption growth but also on the cross-sectional variance of the individual consumers' consumption growth. Copyright 1996 by University of Chicago Press.

Suggested Citation

  • Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-240, April.
    • Handle: RePEc:ucp:jpolec:v:104:y:1996:i:2:p:219-40
    DOI: 10.1086/262023
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    References listed on IDEAS

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