The authors investigate why 75 percent of U.S. households do not hold stocks despite the equity premium and predictions of expected-utility models. The question is relevant for privatization, asset pricing, and tax progressivity issues. They show that risk aversion per se, heterogeneity of...

Long-run analysis is often based on perfect foresight equilibrium relationships arbitrarily augmented to incorporate stochastic shocks. This paper examines whether perfect foresight models admit interpretations as limits of stochastic economies and reflect long-run behavior and policy effects....