AI might actually hurt the stock market by making it too expensive for regular workers to buy in.
Standard economic models assume AI-driven productivity is always good for stock prices. This paper reveals that if AI displaces enough workers, it creates a 'participation gap' where fewer people can afford to invest, concentrating market risk on a shrinking pool of investors and driving up the risk premium even while fundamentals improve.
When Does AI Raise the Equity Risk Premium? Displacement, Participation, and Structural Regimes
SSRN · 6327279
We develop a heterogeneous-agent framework in which AI-driven labour displacement affects the equity risk premium (ERP) through three co-equal channels. The productivity channel raises corporate cash flows and is equity-bullish. The participation compression channel operates through household wealth: displacement pushes marginal households below the equity market entry cost κ, concentrating aggregate consumption risk on a shrinking investor pool and-by the Basak-Cuoco mechanism-raising the requi