Wealth and Stock Market Participation: Estimating the Causal Effect From Swedish Lotteries

In this paper we estimate the causal effect of wealth on stock market participation. The positive cross-sectional relationship between participation and wealth is well-established, with previous work suggesting that moderate costs of stock market participation are capable of rationalizing the decision of most non-participants. In our study we use a large sample of Swedish lottery players whom were randomly assigned over 1 billion USD, linked to administrative tax records of asset holdings, to precisely identify both the effect of wealth and the costs necessary to explain non-participation. Although we estimate a positive effect of wealth on participation, our estimate is much smaller than that implied by the cross-section. Furthermore, our estimates of participation costs are 10-20 times higher than those proposed in previous studies. We interpret these results within a structural model of life-cycle stock market participation, and use participation responses following random wealth assignment to estimate entry and participation costs conditional on a variety of demographic and individual characteristics. We conclude that it is unlikely that fixed financial costs are credible explanations for equity market non-participation.