Inequality risk premia

Using a long time-series of U.S. income inequality, I find that the market pays higher prices for assets that hedge against increased inequality. This is consistent with the prediction of an incomplete-markets model incorporating preferences over both comparative and noncomparative consumption "goods" when the weight on the former is large. The model implies that the time-series properties of the premium can be used to identify the substitutability of these two sources of utility. There is evidence that the magnitude of the (negative) inequality risk premium is countercyclical, suggesting that agents care more about status when they are worse off. (C) 2012 Elsevier B.V. All rights reserved.