Working Paper: NBER ID: w1468
Authors: Mervyn A. King; Jonathan I. Leape
Abstract: In this paper, we examine a new survey of 6,010 U.S. households and estimate a model for the allocation of total net worth among different assets. The paper has three main aims. The first is to investigate the extent to which a conventional portfolio choice model can explain the differences in portfolio composition among households. Our survey data show that most households hold only a subset of the available assets. Hence we analyze a model in which investors choose to hold incomplete portfolios. We show that the empirical specification of the joint discrete and continuous choice that characterizes household portfolio behavior is a switching regressions model with endogenous switching. The second aim is to examine the impact of taxes on portfolio composition. The survey contains a great deal of information on taxable incomes and deductions which enable us to calculate rather precisely the marginal tax rate facing each household.The third aim is to estimate wealth elasticities of demand for a range of assets and liabilities. We test the frequently made assumption of constant relative risk aversion.
Keywords: household savings; portfolio choice; taxation; wealth elasticity
JEL Codes: D14; H24; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conventional portfolio choice model (G11) | differences in household portfolio composition (G59) |
| taxes (H29) | portfolio composition (G11) |
| households' changes in wealth (D14) | probability of asset ownership (D14) |
| households' changes in wealth (D14) | conditional demand for assets (E41) |
| portfolio composition (G11) | asset ownership (H82) |