A note on equity premia in markets with heterogeneous agents

We analyze a static partial equilibrium model where the agents are not only heterogeneous in their beliefs about the return on risky assets but also in their attitude to it. While some agents in the economy are subjective utility maximizers others behave ambiguity averse in the sense of Knight (1921). If ambiguity averse agents meet overly optimistic subjective utility maximizers in the market lower equity premia can arise in the equilibrium than in a purely subjective utility framework.