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Investor sophistication and capital income inequality

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  • Marcin Kacperczyk
  • Jaromir Nosal
  • Luminita Stevens

Abstract

We study the determinants of capital income inequality in a general equilibrium portfolio choice model with endogenous information acquisition. The key elements of the model are heterogeneity in investor sophistication and in asset riskiness. The model implies capital income inequality that increases with aggregate information technology, given initial heterogeneity in sophistication. The main mechanism in the model works through endogenous investor participation in assets with different risk. Across assets, the pattern of expansion of sophisticated investors and retrenchment of unsophisticated investors, unique to our model, is consistent with asset ownership dynamics for the U.S. Quantitatively, the model generates a path for capital income inequality that matches the evolution of inequality in U.S. data.

Suggested Citation

  • Marcin Kacperczyk & Jaromir Nosal & Luminita Stevens, 2015. "Investor sophistication and capital income inequality," NBP Working Papers 199, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:199
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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