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Asset pricing with heterogeneous consumers

  • Constantinides,George
  • Duffie,Darrel

    (Constantinides:University of Chicago Duffie:Stanford University)

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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Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 381.

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Date of creation: Aug 1992
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Handle: RePEc:bon:bonsfa:381
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Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany

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Web page: http://www.bgse.uni-bonn.de

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