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Optimal Financial Knowledge and Wealth Inequality

Listed author(s):
  • Annamaria Lusardi
  • Pierre-Carl Michaud
  • Olivia S. Mitchell

We show that financial knowledge is a key determinant of wealth inequality in a stochastic life cycle model with endogenous financial knowledge accumulation, where financial knowledge enables individuals to better allocate lifetime resources in a world of uncertainty and imperfect insurance. Moreover, because of how the US social insurance system works, better-educated individuals have most to gain from investing in financial knowledge. Our parsimonious specification generates substantial wealth inequality relative to a one-asset saving model and one in which returns on wealth depend on portfolio composition alone. We estimate that 30–40 percent of retirement wealth inequality is accounted for by financial knowledge.

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File URL: http://dx.doi.org/10.1086/690950
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File URL: http://dx.doi.org/10.1086/690950
Download Restriction: Access to the online full text or PDF requires a subscription.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 125 (2017)
Issue (Month): 2 ()
Pages: 431-477

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Handle: RePEc:ucp:jpolec:doi:10.1086/690950
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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