Information, Impact, Ignorance, Illegality, Investing, and Inequality

TL;DR

This paper proposes a simple mechanism that explains several economic puzzles, such as high cyclically adjusted P/E ratios, capital gains outpacing wages, and persistent equity premiums, shedding light on inequality and market dynamics.

Contribution

It introduces a novel mechanism that accounts for these phenomena, providing a unified explanation for multiple longstanding economic puzzles.

Findings

Explains high cyclically adjusted P/E ratios

Accounts for capital gains outpacing wages

Clarifies persistence of the equity premium

Abstract

We note a simple mechanism that may at least partially resolve several outstanding economic puzzles, including why the cyclically adjusted price to earnings ratio of the S&P 500 index has been oddly high for the past two decades, why gains to capital have outpaced gains to wages, and the persistence of the equity premium.