Market incompleteness and the equity premium puzzle: Evidence from state-level data

► We compare risk aversion estimates in complete- and incomplete-markets environments. ► For the incomplete-markets case, we use consumption data for the 50 US states. ► The rate of risk aversion under the incomplete-markets setup is much lower. ► Higher moments of the cross-sectional distribution of consumption growth matter. ► Market incompleteness helps explain the equity premium puzzle.