Risky, Lumpy Human Capital in Household Portfolios

Urvi Neelakantan, Felicia Ionescu and Kartik Athreya
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Felicia Ionescu: Federal Reserve Board

No 1242, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper we aim to understand the evolution of household portfolios, defined broadly enough to include both human and financial wealth positions, over the life-cycle. A key feature of our approach is to include lumpy initial investments (formal education) and subsequent “on the job†training à la Ben-Porath (1967), where both are risky. To our knowledge we are the first to study human and financial investment decisions in such a setting. An important payoff of our approach is a unified view of household wealth over the life cycle. Quantitatively, a key finding is that our model is able to account for limited stock market participation with no appeal whatsoever to transactions costs. Instead, “corner solutions†to stock purchases emerge naturally from the optimality of front loading investment in human capital.

Date: 2014
New Economics Papers: this item is included in nep-dge and nep-mfd
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