Investment Sophistication and Wealth Inequality

52 Pages Posted: 3 Feb 2019 Last revised: 23 Jul 2020

See all articles by Ehsan Azarmsa

Ehsan Azarmsa

University of Chicago, Booth School of Business

Date Written: December 1, 2019

Abstract

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

Azarmsa, Ehsan, Investment Sophistication and Wealth Inequality (December 1, 2019). Available at SSRN: https://ssrn.com/abstract=3206823 or http://dx.doi.org/10.2139/ssrn.3206823

Ehsan Azarmsa (Contact Author)

University of Chicago, Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
3122567183 (Phone)

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