Identifying S-Shaped Consumption Utility and Solving the Equity Premium Puzzle

We identify the S-Shaped consumption utility by reconciling consumption decisions with asset returns. Different from the concave-shaped utility, the S-shaped consumption utility predicts a possible negative correlation between low quantiles of consumption growth and asset returns, for which we find evidence from micro-level consumption data. The ``partial" negative correlation accounts for the low correlation between consumption growth and asset returns, which is at the heart of many pricing puzzles. Using an estimable asset pricing model built upon micro consumption, we show that the S shape and the partial negative correlation quantitatively solve the equity premium puzzle