Intermediated Quantities and Returns

Posted: 19 Jul 2008

See all articles by Rajnish Mehra

Rajnish Mehra

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics; National Bureau of Economic Research (NBER)

Facundo Piguillem

Einaudi Institute for Economics and Finance (EIEF)

Edward C. Prescott

Arizona State University (ASU) - Economics Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2008

Abstract

A large amount of intermediated borrowing and lending takes place between households. The average difference in these rates is over 2 percent. In this paper, we develop a model economy that displays these facts and matches not only the returns on assets but also their quantities. The heterogeneity giving rise to borrowing and lending and differences in equity holdings results from differences in preferences for making bequests. In equilibrium, lenders are annuity holders and borrowers are equity holders. The borrowing rate and return on equity are the same in our model, which has no aggregate uncertainty. With intermediation costs, the lending rate is less than the borrowing rate and there is an equity premium. Within age cohorts, human capital endowments and inheritances are identical. As a result, there is almost no dispersion in consumption, yet there is a sizable dispersion in net worth and a huge dispersion in equity holdings.

Keywords: Asset returns, Assets quantities, Life cycle, Bequests, General equilibrium

JEL Classification: G1, E2, E44

Suggested Citation

Mehra, Rajnish and Piguillem, Facundo and Prescott, Edward C., Intermediated Quantities and Returns (April 2008). Available at SSRN: https://ssrn.com/abstract=1162874

Rajnish Mehra (Contact Author)

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics ( email )

Tempe, AZ 85287-3806
United States
480 965 6335 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Facundo Piguillem

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana, 62
Rome, 00187
Italy

Edward C. Prescott

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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