Asset Pricing in a Lucas Economy with Recursive Utility Heterogeneous Agents

We extend the Lucas economy (1978) to the case of preferences a la Kreps-Porteus (1978) when the dividend (fruit) process follows a geometric Brownian Motion. In the representative agent case, the equilibrium price reveals a two-stage mechanism. First, the risk averse agent adjusts downward the average growth rate of dividends to incorporate uncertainty. Then, the e¤ect of the intertemporal elasticity of substitution (I.E.S.) depends on the sign of this adjusted growth rate of dividends. In agreement with Hall (1988), the paper illustrates the key role played by I.E.S. on the equilibrium price. The extension to the heterogeneous agents case allows us to analyze the wealth distribution and its e¤ects on the equilibrium price. Individuals who either highly value the future or who are both willing to substitute consumption over time and display low risk aversion will asymptotically accumulate all the wealth in the economy. Wealth concentration leads to an increase in the equilibrium price. JEL classi...cation: G12, C68, D81.