Equity Culture and the Distribution of Wealth

Theory often suggests that wider household participation in stockholding reduces wealth inequality by expanding access. Empirical participation literature raises concerns that newcomers may be less educated, less sophisticated, and poorer. We use SCF data to decompose changes in wealth inequality between 1989 and 2001, through a stock market boom and a downturn. Equity wealth inequality is important for net wealth inequality, despite equity’s limited share. The relation between increased participation, net wealth inequality, and composition of the stockholder pool differs considerably between boom and downturn: inequality rose during the boom and fell during the downturn. When we distinguish changes in configuration of the stockholder pool from changes in the influence of given characteristics, our estimates imply that the 1989 and the 2001 stockholder pools would have produced higher equity holdings in 1998 than actually observed for 1998 stockholders. This arises from differences both in optimal holdings and in financial attitudes and practices, suggesting a dilution effect of the boom followed by a cleansing effect of the downturn. The incidence of cumulative gains and losses in stockholding is significantly influenced by investment horizon and portfolio breadth but, controlling for those, use of professional advice is either insignificant or counterproductive