Abstract: This paper quantifies the general equilibrium effects of financial innovation that increases access to equity markets. I study an overlapping generations model with both idiosyncratic and aggregate risk, solved with machine learning techniques. A benchmark economy with limited stock market participation and rebalancing frictions matches the current dynamics of macro aggregates, equity and bond returns, as well as wealth and portfolio concentra- tion. A counterfactual experiment shows how widespread adoption of target date funds would improve risk sharing, reduce inequality, and generate substantial welfare gains for households in the bottom 90% of wealth distribution. The equity premium drops from 6.3% to 2.5%, while the standard deviation of equity returns stabilizes from 24.7% to 15.2%. A full transition from the benchmark economy to the target date economy would generate around 20% average welfare gains for people in the bottom 90% at the cost of the top 10% who lose by more than 50% through the redistribution of financial wealth. Asset pricing and welfare outcomes are very close between an economy with target date funds and one without any participation costs or rebalancing frictions.
Benjamin Moll, London School of Economics and Political Science
Gisle Natvik, BI Norwegian Business School
Abstract: Over the last several decades, there has been a large increase in asset valuations across many asset classes. While these rising valuations had important effects on the distribution of wealth, little is known regarding their effect on the distribution of welfare . To make progress on this question, we develop a sufficient statistic for the money-metric welfare effect of deviations in asset valuations (i.e., changes in asset prices keeping cash flows fixed). This welfare effect depends on the present value of an individual's net asset sales rather than asset holdings: higher asset valuations benefit prospective sellers and harm prospective buyers. We estimate this quantity using panel microdata covering the universe of financial transactions in Norway from 1994 to 2019. We find that the rise in asset valuations had large redistributive effects: it redistributed from the young towards the old and from the poor towards the wealthy.
Discussant: Juliana Salomao, University of Minnesota
Abstract: How are households exposed to interest-rate risk? When rates fall, households face lower future expected returns but those holding long-term assets—disproportionately the wealthy and middle-aged—experience capital gains. We study the hedging demand for long-term assets in a portfolio choice model. The optimal interest-rate sensitivity of wealth is hump-shaped over the life cycle. Within cohorts, it increases with wealth and earnings. These predictions fit observed patterns in the United States, suggesting a relatively efficient distribution of interest-rate risk. By protecting workers from rate fluctuations, Social Security limits the welfare consequences of rising wealth inequality when rates fall.
Discussant: Jack Favilukis, University of British Columbia
