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Home Bias in Portfolios and Taxation of Asset Income

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  • Roger Gordon
  • Vitor Gaspar

Abstract

Intuitively, the observed 'home bias' in individual portfolios plausibly explains the international capital immobility in aggregate data reported by Feldstein and Horioka (1980) as well as the survival of taxes on capital income. These intuitions are examined explicitly in a model where random consumer prices cause individuals to invest heavily in domestic equity as a hedge against these price fluctuations. Neither intuition is fully supported by the model. While the model forecasts that extra domestic savings generate extra investment primarily in the home country, consistent with the evidence in Feldstein and Horioka, this is true regardless of whether consumer price are random and so whether portfolios have 'home bias.' In addition, while random equity returns facilitate taxes on equity income, as shown in Gordon and Varian (1989) and Huizinga and Nielsen (1997), random consumer prices appear to undermine taxes on capital income.

Suggested Citation

  • Roger Gordon & Vitor Gaspar, 2001. "Home Bias in Portfolios and Taxation of Asset Income," NBER Working Papers 8193, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8193
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    1. Gordon, Roger H. & Varian, Hal R., 1989. "Taxation of asset income in the presence of a world securities market," Journal of International Economics, Elsevier, vol. 26(3-4), pages 205-226, May.
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    Cited by:

    1. Fossen, Frank M. & Simmler, Martin, 2016. "Personal Taxation of Capital Income and the Financial Leverage of Firms," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 23(1), pages 48-81.
    2. Gordon, Roger H. & Li, Wei, 2003. "Government as a discriminating monopolist in the financial market: the case of China," Journal of Public Economics, Elsevier, vol. 87(2), pages 283-312, February.
    3. Wagner, W.B., 2002. "Risk sharing under incentive constraints," Other publications TiSEM 1bd8e44d-62a5-4cf7-96b2-f, Tilburg University, School of Economics and Management.
    4. Detken, Carsten & Winkler, Bernhard & Gaspar, Ví­tor, 2004. "On prosperity and posterity: the need for fiscal discipline in a monetary union," Working Paper Series 420, European Central Bank.
    5. Apergis, Nicholas & Tsoumas, Chris, 2009. "A survey of the Feldstein-Horioka puzzle: What has been done and where we stand," Research in Economics, Elsevier, vol. 63(2), pages 64-76, June.

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