Intermediated Quantities and Returns

ABSTRACT __________________________________________________________________________ There is a large amount of intermediated borrowing and lending between households. The average difference in borrowing and lending rates is over 2 percent. In this paper, we develop a model economy that displays these facts and matches not only the returns on assets but also their quantities. The heterogeneity giving rise to borrowing and lending and differences in equity holdings is the result of differences in preferences for making bequests. In equilibrium, the lenders are annuity holders and the borrowers are the equity holders. The borrowing rate and return on equity are the same in our model which has no aggregate uncertainty. As there are intermediation costs, the lending rate is less than the borrowing rate and there is an equity premium. Within age cohorts, human capital endowments and inheritances are identical. A consequence of this is that there is almost no dispersion in consumption, yet there is a sizable dispersion in net worth and a huge dispersion in equity holdings