Investment Sophistication and Wealth Inequality
52 Pages Posted: 3 Feb 2019 Last revised: 23 Jul 2020
Date Written: December 1, 2019
I examine how differences in the ability to identify profitable investment opportunities contribute to wealth inequality. I analyze a model of financial markets with investors heterogeneously informed about future returns. The unconditional wealth share distribution features a thick right-tail populated by the best-informed investors. Wealth inequality increases with the cost of information acquisition and market liquidity. It is non-monotone in the precision of public information and the size of investments delegated to the best-informed investors. I provide bounds for the speed of wealth dynamics. Using data on US households' beliefs, the model can explain the recent dynamics in wealth inequality.
Keywords: Wealth Inequality, Financial Markets, Asymmetric Information, Portfolio Dynamics, Pareto Distribution
JEL Classification: D82, E21, G11, G14, G51, I24, I26
Suggested Citation: Suggested Citation