Business Economics and Public Policy Papers

Document Type

Journal Article

Date of this Version

4-2017

Publication Source

Journal of Political Economy

Volume

125

Issue

2

Start Page

431

Last Page

477

DOI

10.1086/690950

Abstract

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.

Copyright/Permission Statement

© 2017 by The University of Chicago Press

Embargo Date

3-7-2019

Available for download on Thursday, March 07, 2019

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Date Posted: 27 November 2017

This document has been peer reviewed.