Segmented Asset Markets and the Distribution of Wealth

Using the 2004 Survey of Consumer Finances data, we find significant heterogeneity in household portfolio choice across ages and wealth levels. First, 30 percent of the U.S. households hold high-yield assets defined as stocks, bonds, and mutual and hedge funds. Second, the probability of a household participating in high-yield asset markets is rising with age and wealth level. Lastly, wealthy households tend to hold more of their financial assets as high-yield assets. We study a quantitative overlapping-generations model to explore the effects of segmented assets markets on wealth distribution. At any time, a household is identified by its age, wealth and labour income. There are two asset markets, one associated with a high-yield asset, the other with a low yield asset. At any age, a household gains access to the high-yield asset market through payment of a fixed cost. We estimate earnings processes for households from the Panel Study of Income Dynamics using the minimum method of moments. We choose the distribution of fixed costs associated with access to the high yield asset market, in our model economy, to be consistent with our measure of asset market segmentation from the SCF data. Solving for stationary equilibrium, we study the effect of different11 returns on savings on the distribution of wealth. We first find that segmented asset markets lead to a substantial increase in wealth dispersion across households and move the model economy to empirical measures of overall inequality. Specifically, an alternative model without market segmentation, wherein all households earn the average return on assets in our benchmark segmented markets economy, generates a Gini coefficient for wealth that is approximately 7 to 10 percent lower. Moreover the concentration of wealth in the top percentiles is substantially less. Second, we reproduce the empirical findings that households are more likely to hold high-yield assets if they are older and wealthier. Given recent empirical evidence on heterogeneity in households' portfolios, our results suggest asset market segmentation is an important source of wealth inequality.