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Asset Pricing with Heterogeneous Consumers

  • Constantinides, George M
  • Duffie, Darrell

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.

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File URL: http://dx.doi.org/10.1086/262023
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 104 (1996)
Issue (Month): 2 (April)
Pages: 219-240

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Handle: RePEc:ucp:jpolec:v:104:y:1996:i:2:p:219-40
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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