DP12870 Investor Sophistication and Capital Income Inequality

Author(s): Marcin Kacperczyk, Jaromir Nosal, Luminita Stevens
Publication Date: April 2018
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Programme Areas: Financial Economics, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12870

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.