AI might actually hurt the stock market by making it too expensive for regular workers to buy in.
March 24, 2026
Original Paper
When Does AI Raise the Equity Risk Premium? Displacement, Participation, and Structural Regimes
SSRN · 6327279
The Takeaway
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.
From the abstract
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