TITLE:
Endogenous Stock Market Participation and Wealth Accumulation: A Life-Cycle Model Perspective
AUTHORS:
Dongxu Li, Steve Yang
KEYWORDS:
Life-Cycle Model, Household Finance, Stock Market Participation, Financial Literacy
JOURNAL NAME:
Theoretical Economics Letters,
Vol.14 No.2,
April
16,
2024
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.