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Portfolios of the Rich

  • Christopher D Carroll

Recent research has shown that 'rich' households save at much higher rates than others (see Carroll (2000); Dynan Skinner and Zeldes (1996); Gentry and Hubbard (1998); Huggett (1996); Quadrini (1999)) This paper documents another large difference between the rich and the rest of the population: portfolios of the rich are heavily skewed toward risky assets particularly investments in their own privately held businesses The paper explores three possible explanations of these facts First perhaps there is exogenous variation in risk tolerance so that highly risk tolerant households engage in high-risk high-return activities and the risk-lovers who are lucky constitute the rich A second possibility is that capital market imperfections a la Gentry and Hubbard (1998) and Quadrini (1999) require entrepreneurial activities to be largely self-financed and these same imperfections imply that entreprenurial investment will yield high average returns The final possibility is that wealth enters households' utility functions directly as a luxury good as in Carroll (2000) (one interpretation is that this reflects the utility of anticipated bequests) implying that risk aversion declines as wealth rises The paper concludes that the overall pattern of facts suggests both Carroll-style utility and Gentry/Hubbard-Quadrini style capital market imperfections are important

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Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 430.

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Date of creation: Jul 2000
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Handle: RePEc:jhu:papers:430
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  1. Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2000. "Do the Rich Save More?," NBER Working Papers 7906, National Bureau of Economic Research, Inc.
  2. Oswald, A.J., 1997. "Happiness and Economic Performance," Papers 18, Centre for Economic Performance & Institute of Economics.
  3. Eric M. Engen & William G. Gale & Cori R. Uccello, 1999. "The Adequacy of Retirement Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 65-188.
  4. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  5. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  6. Zou, Heng-fu, 1994. "'The spirit of capitalism' and long-run growth," European Journal of Political Economy, Elsevier, vol. 10(2), pages 279-293, July.
  7. Vincenzo Quadrini, 1997. "Entrepreneurship, saving and social mobility," Discussion Paper / Institute for Empirical Macroeconomics 116, Federal Reserve Bank of Minneapolis.
  8. Yew-Kwang, Ng, 1997. "A case for Happiness, Cardinalism, and Interpersonal Comparability," Departmental Working Papers _081, Chinese University of Hong Kong, Department of Economics.
  9. James M. Poterba, 2001. "Taxation and Portfolio Structure: Issues and Implications," NBER Working Papers 8223, National Bureau of Economic Research, Inc.
  10. Holtz-Eakin, D. & Joulfaian, D. & Rosen, H.S., 1992. "Entrepreneurial Decisions and Liquidity Constraints," Papers 129, Princeton, Department of Economics - Financial Research Center.
  11. Carol C. Bertaut & Michael Haliassos, 1996. "Precautionary Portfolio Behavior from a Life-Cycle Perspective," Finance 9604001, EconWPA.
  12. Hubbard, R. Glenn & Skinner, Jonathan & Zeldes, Stephen P., 1994. "The importance of precautionary motives in explaining individual and aggregate saving," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 59-125, June.
  13. Christopher D Carroll, 1990. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," Economics Working Paper Archive 371, The Johns Hopkins University,Department of Economics, revised Aug 1996.
  14. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
  15. Mervyn A. King & Jonathan I. Leape, 1987. "Asset Accumulation, Information, and the Life Cycle," NBER Working Papers 2392, National Bureau of Economic Research, Inc.
  16. Gurdip S. Bakshi & Zhiwu Chen, 1996. "The Spirit of Capitalism and Stock-Market Prices," CEMA Working Papers 511, China Economics and Management Academy, Central University of Finance and Economics.
  17. repec:cup:cbooks:9780521465434 is not listed on IDEAS
  18. Auten, Gerald & Joulfaian, David, 1996. "Charitable contributions and intergenerational transfers," Journal of Public Economics, Elsevier, vol. 59(1), pages 55-68, January.
  19. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  20. Kahneman, Daniel & Wakker, Peter P & Sarin, Rakesh, 1997. "Back to Bentham? Explorations of Experienced Utility," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 375-405, May.
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