Working Paper: CEPR ID: DP12870
Authors: Marcin Kacperczyk; Jaromir Nosal; Luminita Stevens
Abstract: Capital income inequality is large and growing fast, accounting for a significant portion of total income inequality. We study its determinants in a general equilibrium portfolio choice model with endogenous information acquisition and heterogeneity across household sophistication and asset riskiness. The model implies capital income inequality that grows with aggregate information technology. Investors differentially adjust both the size and composition of their portfolios, as unsophisticated investors retrench from trading risky securities and shift their portfolios toward safer assets. Technological progress also reduces aggregate returns and increases the volume of transactions, features that are consistent with recent U.S. data.
Keywords: Capital Income Inequality; Investor Sophistication; Information Technology
JEL Codes: D31; D53; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate information technology (L86) | capital income inequality (D31) |
| unsophisticated investors (G24) | shift portfolios towards safer assets (G11) |
| shift portfolios towards safer assets (G11) | disproportionate ownership of high-return assets by sophisticated investors (G11) |
| disproportionate ownership of high-return assets by sophisticated investors (G11) | widening gap in capital income (E25) |
| differences in skill and information processing capacity (D83) | return differential between sophisticated and unsophisticated investors (G40) |
| technological advancements in information processing (O33) | exacerbate existing inequalities in capital income (E25) |