Intermediated Quantities and Returns
Posted: 19 Jul 2008
Date Written: April 2008
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: Suggested Citation