Heterogeneous Preferences, Investment, and Asset Pricing
41 Pages Posted: 16 Dec 2016 Last revised: 26 Apr 2019
Date Written: April 21, 2019
We present a production-based model in which agents have heterogeneous risk aversion and heterogeneous discount rates. When the less risk-averse agent is more impatient, the two types of agents can coexist for a long time. The heterogeneity in risk aversion and discount rate induces the wealth share of less risk averse agent to be procyclical, while it leads Tobin's q and the investment-capital ratio to be countercyclical. We also nd that the heterogeneity in risk aversion and discount rate leads to more efficient risk sharing and reduces the volatility of stock returns.
Keywords: Heterogeneous risk aversion, heterogeneous discount rates, investment
JEL Classification: D9, G11, G12
Suggested Citation: Suggested Citation