Overview
Existence of large left-tail shocks in the economy is crucial for the existence of
equity premium and the observed equity volatility. While such shocks have
occurred in the past, their cause, and hence their future distribution (along with their ability to explain the equity premium) remains a matter of debate. We
present an asset pricing model with incomplete markets stemming from
inalienable human capital. We show that inalienable human capital amplifies
aggregate risk, leading to economic disasters that result in higher equity premia and higher volatility, as well as inefficient investment and negative distributional
consequences.