Minisymposium Presentation

This paper quantifies the general equilibrium effects of financial innovation that increases access to equity markets. I study an overlapping generations model with both idiosyncratic and aggregate risk, solved with machine learning techniques. A benchmark economy with limited stock market participation and rebalancing frictions matches the current dynamics of macro aggregates, equity and bond returns, as well as wealth and portfolio concentration. A counterfactual experiment shows how widespread adoption of target date funds would improve risk sharing, reduce inequality, and generate substantial welfare gains for households in the bottom 90% of wealth distribution. The equity premium drops from 6.3% to 2.5%, while the standard deviation of equity returns stabilizes from 24.7% to 15.2%. Full adoption of target date funds would generate around 20% average welfare gains for people in the bottom 90% at the expense of the top 10% who lose by more than 50% through the redistribution of financial wealth. Asset pricing and welfare outcomes are very close between an economy with target date funds and one without any participation costs or rebalancing frictions.