How does a pay-as-you-go system affect asset returns and the equity premium?

When applying a differences-in-differences approach, equity returns and the equity premium are both estimated to be more than four percentage points higher after the introduction of a pay-as-you-go (PAYGO) system. In a realistically calibrated model, the PAYGO system is also found to increase the returns and the premium, although the effects are smaller than in the data. Intuitively, the system lowers asset prices, which in turn increases the importance of dividend risk. Since only equity is subject to dividend risk, equity returns become more volatile relative to bond returns.