Reconciling Increasing Wealth Inequality with Increasing Market Participation and a Decreasing Equity Premium
26 Pages Posted: 3 Nov 2008
Date Written: September 2006
Abstract
Over the last 30 years stock market participation has increased and the equity premium has declined, this would presumably lead to a decrease in wealth inequality. However, just the opposite has happened as wealth inequality has increased. I propose a general equilibrium model which can both resolve the equity premium puzzle and reproduce the high inequality of wealth seen in the data. I use this model to showthat increasing wage inequality can reconcile the initially incompatible observations above. I also use the model to show that changes in age demographics may be responsible for a significant fraction of thedecreasing equity premium.
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