Business Economics and Public Policy Papers
Date of this Version
Journal of Political Economy
We show that financial knowledge is a key determinant of wealth inequality in a stochastic life cycle model with endogenous financial knowledge accumulation, where financial knowledge enables individuals to better allocate lifetime resources in a world of uncertainty and imperfect insurance. Moreover, because of how the US social insurance system works, better-educated individuals have most to gain from investing in financial knowledge. Our parsimonious specification generates substantial wealth inequality relative to a one-asset saving model and one in which returns on wealth depend on portfolio composition alone. We estimate that 30–40 percent of retirement wealth inequality is accounted for by financial knowledge.
© 2017 by The University of Chicago Press
Lusardi, A., Michaud, P., & Mitchell, O. (2017). Optimal Financial Knowledge and Wealth Inequality. Journal of Political Economy, 125 (2), 431-477. http://dx.doi.org/10.1086/690950
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Date Posted: 27 November 2017
This document has been peer reviewed.