Stock Market Participation: The Role of Human Capital, joint with Kartik Athreya and Urvi Neelakantan [in RuW 4.202]
Participation in the stock market is limited, especially early in life.
By contrast, human capital investment is widespread, especially early
in life. Returns to equity are invariant across households, while returns
to human capital vary. We demonstrate in this paper that once human
capital investment is allowed for and, critically, disciplined to match
observed dispersion in earnings, a standard model of portfolio choice
delivers stock market participation rates consistent with the data over
the entire life cycle. Moreover, we show that endogenizing human cap-
ital alters the role of borrowing costs and short sales constraints in
limiting stock market participation.