Optimal Financial Knowledge and Wealth Inequality

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Business Economics and Public Policy Papers
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Business
Economics
Public Affairs, Public Policy and Public Administration
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Lusardi, Annamaria
Michaud, Pierre-Carl
Mitchell, Olivia
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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.

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2017-04-01
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Journal of Political Economy
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