Asset Pricing and Wealth Distribution with Heterogeneous Investment Returns

I obtain a closed-form solution for a general equilibrium model with incomplete markets and heterogeneous agents that allow for an arbitrary number of assets, an arbitrary number of aggregate states, and arbitrary shock distributions for asset returns. Agent heterogeneity has non-trivial implications for asset prices and risk premia. In a stationary equilibrium the conditional distribution of consumption and wealth given initial wealth is double Pareto, which has two power law tails. If the initial wealth is lognormal, the stationary unconditional distribution of consumption and wealth is double Pareto-lognormal, which is empirically supported. The baseline model extends to the case with an arbitrary number of neoclassical firms, labor-leisure decisions, and bequest. In the presence of factor obsolescence or factor-augmenting technological change, there is some risk sharing in equilibrium but the equilibrium is generically constrained inefficient.