Financial Literacy, Portfolio Choice, and Wealth Inequality: A General Equilibrium Approach

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The Wharton School::Wharton Pension Research Council::Wharton Pension Research Council Working Papers
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Economics
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Financial literacy
stock market participation
equity premium
return heterogeneity
wealth inequality
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2024-04-12
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Kim, Min
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Abstract

I develop a general equilibrium model in which households allocate their wealth to safe and risky assets (“bonds” and “stocks”) and accumulate financial literacy to raise their risk-adjusted stock returns. Calibrated to match financial literacy and stock market participation rate of U.S. households, the model demonstrates that a policy subsidizing financial literacy acquisition increases short-run stock investments. In equilibrium, however, the resulting aggregate capital growth lowers the average equity premium, thereby moderating the subsidy’s impact. The policy mitigates wealth inequality by inducing heterogeneous portfolio adjustments across the wealth distribution. With the subsidy, the middle wealth quartiles acquire more financial literacy and shift their portfolios toward stocks. The top quartile attains its maximum literacy level prior to the subsidy and shifts toward bonds to compensate for lower stock returns. The ratio of total wealth held by the top quartile versus the rest of the population decreases.

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PRC WP2024-04
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2024-04-12
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I am indebted to my advisors Dirk Krueger, Olivia S. Mitchell, and Joachim Hubmer for their invaluable guidance and continued support. I extend my special thanks to economists at the Federal Reserve Board and the Federal Reserve Bank of St. Louis for insightful feedback. I also appreciate the inspiration and solidarity shared by the faculty and my fellow Ph.D. students at Penn Economics. All errors are my own. This paper was supported through a Quartet Pilot Research award and was funded by the Boettner Center at the University of Pennsylvania. The content is solely the responsibility of the author and does not necessarily represent the official views of the University of Pennsylvania or National Institutes of Health.
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