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Introducing heterogeneity of beliefs across dierent agents builds a link between wealth distribution and the equity premium. We demonstrate that an economy populated only by risk neutral agents may nonetheless display a strictly positive equity premium. We then place our notion of belief heterogeneity within the popular representative agent construct. We show that any level of belief hetero- geneity in the multi agent economy can be mapped into some speci…c degree of risk aversion of the representative agent economy that keeps equilibrium prices constant. A fully dynamic model follows. Finally, we suggest an explanation for the recent behavior of the eq- uity premium: a story of "heterogeneous optimism" versus "homogeneous pessimism" is presented. JEL codes: D31, D51, D84, G12

Equity Premium: Interaction of Belief Heterogeneity and Distribution of Wealth?