Working Paper: CEPR ID: DP5425
Authors: Jean-Pierre Danthine; John B. Donaldson; Paolo Siconolfi
Abstract: In this paper we entertain the hypothesis that observed variations in income shares are the result of changes in the balance of power between workers and capital owners in labour relations. We show that this view implies that income share variations represent a risk factor of first-order importance for the owners of capital and, consequently, are a crucial determinant of the return to equity. When both risks are calibrated to observations, this distribution risk dominates in importance the usual systematic risk for the pricing of assets. We also show that distribution risks may originate in non-traded idiosyncratic income shocks.
Keywords: distribution risk; equity premium; income shares; limited market participation
JEL Codes: E3; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Variations in income shares (D33) | Returns to equity (G12) |
| Distribution risk (D39) | Returns to equity (G12) |
| Changes in the balance of power between workers and capital owners (D33) | Variations in income shares (D33) |
| Non-traded idiosyncratic income shocks (D89) | Distribution risk (D39) |
| Characteristics of income share shocks (D33) | Financial properties of the model (C52) |