In this paper we reconcile two opposing views about the elasticity of intertemporal substitution in consumption (EIS). Empirical studies using aggregate consumption data typically find that the EIS is close to zero (Hall, 1988). Calibrated models designed to match growth and fluctuations facts...

In this paper we study asset prices in a parsimonious two-agent macroeconomic model with two key features: limited participation in the stock market and heterogeneity in the elasticity of intertemporal substitution in consumption. The parameter values for the model are taken from the business...

In this paper we extend the results of recent studies on the existence of equilibrium in finite dimensional asset markets for both bounded and unbounded economies. We do not assume that the individual's preferences are complete or transitive. Our existence theorems for asset markets allow for...

In competitive economies with private firm ownership, incomplete markets, and firm shareholders changing over time, several firm objectives have been proposed. Some are useful to understand efficiency of equilibria, and others are explicitly consistent with majority shareholder control or...

A new measure of constrained efficiency for application in economies with incomplete markets is presented. This measure --- termed Allais- Malinvaud efficiency --- can be viewed as adjusting for market incompleteness not fully captured in previous work. It is shown that equilibrium allocations...

This paper analyzes the extent of risk-sharing among stockholders and among nonstockholders. Wealthy households play a crucial role in many economic problems due to the substantial concentration of asset holdings in the U.S. data. Hence, to evaluate the empirical importance of market...

This article attempts to extend the complete market option pricing theory to incomplete markets. Instead of eliminating the risk by a perfect hedging portfolio, partial hedging will be adopted and some residual risk at expiration will be tolerated. The risk measure (or risk indifference) prices...

The large wealth and consumption inequality in the U.S. is usually attributed to two market frictions: debt constraints and incomplete markets. Recent literature has argued that debt constraints are the critical friction while market incompleteness plays only a secondary role. We evaluate the...