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Institutional Capital and Asset Pricing: A Modified Lucas Tree Model Integrating Coase-Williamson-Demsetz-Barzel Insights

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  • Heng-fu Zou

Abstract

This paper extends the Lucas (1978) asset pricing framework by incorporating institutional capital as both a productive asset enhancing dividend growth-and a direct source of utility. Building on the insights of Coase, Demsetz, Williamson, and Barzel, we model institutional investment alongside consumption, deriving closed-form affine pricing solutions under stochastic institutional quality. The model demonstrates how in stitutional capital influences the price-dividend ratio, risk-free rate, and equity premium through both productivity and preference channels. Analytical results and simulations reveal that stronger institutional investment raises asset values, lowers risk premia, and stabilizes returns, bridging institutional economics with modern asset pricing theory.

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  • Heng-fu Zou, 2025. "Institutional Capital and Asset Pricing: A Modified Lucas Tree Model Integrating Coase-Williamson-Demsetz-Barzel Insights," CEMA Working Papers 784, China Economics and Management Academy, Central University of Finance and Economics.
    • Handle: RePEc:cuf:wpaper:784
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    References listed on IDEAS

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    1. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    2. Barzel,Yoram, 1997. "Economic Analysis of Property Rights," Cambridge Books, Cambridge University Press, number 9780521597135, February.
    3. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
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