Author(s): Kwok Yan Chiu
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This paper investigates how differences in subjective beliefs about stock returns contribute to wealth inequality through portfolio choice. I argue that this channel significantly contributes to wealth inequality in the US. Using the Michigan Survey of Consumers, I find that (1) subjective beliefs about future stock returns are widely dispersed, (2) optimistic households are more likely to participate in the stock market and invest more in stock, and (3) subjective beliefs are persistent over time. Motivated by these findings, I develop and calibrate a heterogenous-agent model that matches data on income inequality, beliefs distribution and portfolio choice. Compared to a model without dispersion in beliefs, the model with belief heterogeneity generates an additional 0.12 in the Gini coefficient of wealth inequality and 10 percent more wealth owned by the top 15% of the households. This suggests that the dispersion in subjective beliefs about stock returns could be an important factor in explaining the size of wealth inequality in the US.
Published: 2024-12-28 13:45:32 PT
Stage: Working Paper
Fields: Macroeconomics, Financial Economics
Research Group(s): Playground
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Versions: v1 (12/28/2024)