Household Portfolio Accounting

American households vary largely in their portfolio composition of safe and risky assets, defined as stocks, real estate, and non-corporate business. We consider a standard life-cycle model with labor income risk and portfolio choice (Cocco et al. 2005), augmented with a savings wedge that lowers the return on saving and a risky wedge that lowers the relative return on risky assets. Using the SCF (1989–2016), we compute household-level wedges that rationalize the data, in the spirit of Chari et al.(2007). This paper has three main contributions. First, we use the wedges to guide plausible frictions that researchers should consider. Second, we analyze the extent to which household characteristics can account for the wedges. For example, we find that risky wedges are decreasing in age and education, smaller for self-employed households and home owners, and larger for male and black households. Finally, in a hypothetical exercise of reducing the wedges, as in Hsieh and Klenow (2009), we investigate the changes to wealth levels and wealth inequality in the U.S.