Working Paper: NBER ID: w20684
Authors: Russell Cooper; Guozhong Zhu
Abstract: This paper studies household financial choices: why are these decisions dependent on the education level of the household? A life-cycle model is constructed to understand a rich set of facts about decisions of households with different levels of educational attainment regarding stock market participation, the stock share in wealth, the stock adjustment rate and the wealth-income ratio. Model parameters, including preferences, the cost of stock market participation and portfolio adjustment costs, are estimated to match the financial decisions of different education groups. Based on the estimated model, education affects household finance mainly through increased average income. The estimation also finds evidence that higher educational attainment is associated with a lower stock market entry cost and a larger discount factor. Education specific differences in income risks, medical expenses, mortality risks and the life-cycle pattern of income explain relatively little of the observed differences in household financial choices.
Keywords: household finance; education; lifecycle; financial choices
JEL Codes: E21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| education (I29) | average income (D31) |
| average income (D31) | household financial choices (G50) |
| education (I29) | stock market entry costs (G10) |
| education (I29) | discount factors (H43) |
| education (I29) | stock market participation rates (G10) |
| education (I29) | financial outcomes (G39) |
| education (I29) | preferences and adjustment costs (D11) |