Wealth Inequality and Asset Pricing
We consider an economy with a complete set of competitive markets for contingent claims. We examine how wealth inequality affects the equilibrium value of the equity premium and the risk-free rate. We forst show that welath inequality raises the equity premium if and only if the inverse of absolute risk aversion is concave in welath. We also show that the equilibrium risk-free rate is reduced by wealth inequality if the inverse of the coefficient of absolute prudence is concave.
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