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Abstract
  • The standard overlapping generations model is extended to include retradeable paper assets (shares) of firms. Two period lived consumers hold portfolios including paper assets and capital in order to transfer wealth over time. An infinitely lived firm produces a stochastic output using a Cobb-Douglas production function with an additive shock. The random output is paid as dividends to shares while factor prices receive their marginal products. Using the functional rational expectations approach, the paper derives the dynamic MSV solution for i.i.d. production shocks induced by the GAMMA distribution and for CARA utility functions for consumers. It is shown that the resulting dynamics is one-dimensional, deterministic, and noncyclical. Multiple steady states may arise when the capital share is more than one half and the risk adusted return in the asset market is high. In this case, an economcy may suffer from a poverty trap which is purely endogenously generated without requiring externalities of non-convexities.
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