Optimal Financial Knowledge and Wealth Inequality

Annamaria Lusardi (), Pierre-Carl Michaud and Olivia Mitchell

Journal of Political Economy, 2017, vol. 125, issue 2, 431 - 477

Abstract: We show that financial knowledge is a key determinant of wealth inequality in a stochastic life cycle model with endogenous financial knowledge accumulation, where financial knowledge enables individuals to better allocate lifetime resources in a world of uncertainty and imperfect insurance. Moreover, because of how the US social insurance system works, better-educated individuals have most to gain from investing in financial knowledge. Our parsimonious specification generates substantial wealth inequality relative to a one-asset saving model and one in which returns on wealth depend on portfolio composition alone. We estimate that 30–40 percent of retirement wealth inequality is accounted for by financial knowledge.

Date: 2017
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Working Paper: Optimal Financial Knowledge and Wealth Inequality (2013)
Working Paper: Optimal Financial Knowledge and Wealth Inequality (2013)
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