We explore how the introduction of habit preferences into the simple intertemporal consumption-based capital asset pricing model "solves" the equity premium and risk-free rate puzzles. Our exploration employs spectral utility functions that decompose agents' preferences for consumption...

Since 1975, an increase in the return to skill (measured by years of education), in the percentage of the labor force that is skilled, and in the variance of wage income within skill categories have characterized the U.S. labor market. While the first two facts point towards an increase in the...