Macro-Financial Trends in a Model with Concentrated Ownership of Capital

The U.S. stock market participation rate rose substantially since the 1980s. This paper studies the macro-financial implications of such structural change in a production-based asset-pricing model with external habits, which make investors' effective risk tolerance time-varying and increasing with consumption. In this setup, higher participation generates a fall in the risk-free rate and an increase in the equity premium, consistent with recent U.S. trends. These novel results stem from a decline in the average participant's risk tolerance, due to the entry of lower-consumption households relative to incumbents. Micro-level evidence from the U.S. Consumer Expenditure Survey supports the main model mechanism.