Working Paper: NBER ID: w20246
Authors: Marcin Kacperczyk; Jaromir B. Nosal; Luminita Stevens
Abstract: What contributes to the growing income inequality across U.S. households? We develop an information- based general equilibrium model that links capital income derived from financial assets to a level of investor sophistication. Our model implies income inequality between sophisticated and unsophisticated investors that is growing in investors' aggregate and relative sophistication in the market. We show that our model is quantitatively consistent with the data from the U.S. market. In addition, we provide supporting evidence for our mechanism using a unique set of cross-sectional and time-series predictions on asset ownership and stock turnover.
Keywords: Income Inequality; Investor Sophistication; Capital Income
JEL Codes: E24; E25; E44; G11; G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor sophistication (G11) | Capital income inequality (D31) |
| Sophisticated investors (G11) | Higher capital income than unsophisticated investors (G11) |
| Increasing market sophistication (D40) | Increase in sophisticated investors' ownership and returns (G24) |
| Increasing informational advantage of sophisticated investors (G14) | Retrenchment of unsophisticated investors from trading risky assets (G11) |
| Differences in information processing capabilities (D83) | Diverging wealth accumulation patterns (D31) |