The equity premium puzzle is found during the test of the Consumption-based Capital Asset Pricing Model (CCAPM) with aggregate consumption data. Because of income disparity, many consumers lack financial assets to intertemporally allocate their consumptions under income constraints. Thus, it is likely to lead to a specification error by employing aggregate consumption data to test the CCAPM. This paper examines the impacts of the economically constrained (low-income) consumers and unconstrained (high-income) consumers on the CCAPM using urban consumption expenditures in China delineated by consumer income, and tests the income constraint hypothesis. The empirical results show that the CCAPM is not more consistent with the consumption pattern of the higher-income consumers. Including the income constraint into the analyses of the consumption and asset returns does not unravel the equity premium puzzle.

Using China’s provincial data from 1991 to 2005, this paper analyzes the impact of urban income disparity on their consumption based on static and dynamic panel data models and state space model. The GMM and Kalman Filter methods are used in the estimation and the variables such as income and price are controlled. The empirical results show that the elasticity of permanent income to consumption is much higher than that of temporary income; and the impact of income disparity on consumption is negative and substantial. A rise of 0.01 in the absolute value of Gini coefficient will cause a reduction of 0.35% in consumption on average. The effects fluctuate with the change of economic structure, consumption expectation and economic cycle. In the beginning years of 1990s, it is positive to enlarge income disparity moderately for consumption. It is the year of 1996 that the negative effect first appears in China. During 1998–2004, an increase of 0.01 to the absolute value of Gini coefficient will result in the reduction of consumption to fluctuate between 0.37% and 0.54%. In order to enlarge domestic demand and promote consumption, the focus should be the improvement of permanent income instead of temporary income, and the vigorous policies to reduce income disparity.

The research on the consumption-based asset pricing theory is limited to the developed capital markets. This paper seeks to extend the research to the Chinese developing capital market. It analyzes the dynamic relationship between the Chinese residents’ consumption, stock market returns and interest rates with the CCAPM. According to the analyses of this paper, the IV regression results are mixed. However, the data can fit the model relatively well, and the empirical results fail to reject the model. Thus, the results show that a relationship between the Chinese residents’ consumption growth rates and the asset returns does indeed exist, and that the consumption volatility risk could influence the asset returns.

Empirical evidence suggests that it may cost time, effort, and resources to implement an optimal consumption-saving plan, although the cost may differ across individuals. This paper explores the implications of such friction. We begin by documenting a series of facts on consumption and savings over the life cycle, each of which goes against the prediction of the standard life-cycle model. While the existing studies demonstrate how various permutations of the benchmark model may help resolve one or another of these puzzles, it appears difficult to jointly rationalize even a small subset of these facts within the existing theories. We then incorporate a feature of costly implementation into the benchmark model and show that the addition of this one feature moves in the right direction in jointly resolving all these puzzles. This friction is the sole and common mechanism in our model for rationalizing this series of facts, as we intentionally abstract from the mechanisms explored in the existing literature that are known to help explain one or another of these facts, in order to isolate the role of costly implementation. The implementation costs in the model are small, yet our results show that the mechanism can be important in complementing the existing theories to help account for these consumption and saving facts in a unified framework.

This article contributes to a wider critique of the use of European capitalist, patterns of industrialization in studies of the economic history of modern China—patterns commonly assumed to be universally valid. This sort of analytical framework denies not only the value of alternative economic models, but also that of Chinese independent economic thought. In this context, the present article argues that most of the intellectual changes of seventeenth-century Europe that led to the formulation of liberal capitalism—resistance to government intervention, support for luxury consumption as well as a new understanding of the market and of the relationship between private interests and morality—had taken place in China more than a century earlier. The background against which the two processes emerged, however, varied significantly, leading to distinctive ramifications. Unprecedented population growth and a widening gap between hinterland and coastal economies led Chinese officials and intellectuals to discard ideas of free market and focus instead on solutions for increasing production, maximizing the circulation of resources, and fighting poverty. It was not, therefore, a lack of a “scientific” understanding of the economy that led China to turn away from European-style laissez fare, but rather an evaluation of the Empire’s circumstances, raising questions on whether the European model is indeed universally applicable regardless of local conditions.