Endogenous Stock Market Participation and Wealth Accumulation: A Life-Cycle Model Perspective
- 1 School of Business, Stevens Institute of Technology, Hoboken, NJ, USA
- 2 School of Business, Stevens Institute of Technology, Hoboken, NJ, USA
Abstract
We propose a life-cycle model, where individuals facing uninsured labor income risks choose whether to participate in the stock market and make decisions on home ownership, in an environment with a social safety net and the retirement savings system. The model is motivated by the empirical finding that active stock market participation is associated with higher education and employment experience in the finance sector. The model exhibits a good fit on portfolio choice, home ownership, and consumption patterns in the cross-section and through the life cycle. The lack of stock market access, approximated by a fixed entry cost and variable costs, plays a crucial role in generating heterogeneous outcomes in agents’ wealth accumulation, increasing wealth inequality.
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