Inequality, premium and the timing of resolution of uncertainty

We incorporate Epstein-Zin preferences in an exchange economy with income uncertainty and examine the effect of inequality on the equity risk premium. When agents have preference for late resolution of uncertainty, inequality increases the premium for low income uncertainty and decreases the premium for large income uncertainty. When agents have preference for early resolution of uncertainty, inequality increases the equity premium even when the level of income uncertainty is large. Our results suggest that the time preference for resolution of uncertainty has an important effect on income uncertainty, which subsequently affects the relationship of inequality with the equity risk premium. •We explore time aversion, inequality and equity premia in a background risk economy.•The curvature of the absolute risk tolerance is linked with the type of time preferences.•With early resolution of uncertainty, inequality will always increase the premium.•Intuitively, early resolution of uncertainty time-diversifies background risk.