The Implications of Heterogeneity and Inequality for Asset Pricing

Does heterogeneity matter for asset pricing and in particular for risk premia? Starting with an irrelevance result, I classify the literature into two groups of papers according to how they link investor heterogeneity and risk premia. The first group contains models of investors who differ in terms of their preferences, beliefs, or access to markets. Despite their differences, these models have similar implications, and can be analyzed in a unified way. The second group of papers consists of models where investors experience uninsurable income shocks. The goal of this survey is to provide one unified framework to better understand this large literature, and especially to reconcile several of the seemingly inconsistent results found in some seminal papers.