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Wealth and Stock Market Participation: Estimating the Causal Effect From Swedish Lotteries

Robert Östling (), Erik Lindqvist (), David Cesarini and Joseph Briggs ()
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David Cesarini: New York University

No 806, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper we estimate the causal effect of wealth on stock market participation. The positive cross-sectional relationship between participation and wealth is well-established, with previous work suggesting that moderate costs of stock market participation are capable of rationalizing the decision of most non-participants. In our study we use a large sample of Swedish lottery players whom were randomly assigned over 1 billion USD, linked to administrative tax records of asset holdings, to precisely identify both the effect of wealth and the costs necessary to explain non-participation. Although we estimate a positive effect of wealth on participation, our estimate is much smaller than that implied by the cross-section. Furthermore, our estimates of participation costs are 10-20 times higher than those proposed in previous studies. We interpret these results within a structural model of life-cycle stock market participation, and use participation responses following random wealth assignment to estimate entry and participation costs conditional on a variety of demographic and individual characteristics. We conclude that it is unlikely that fixed financial costs are credible explanations for equity market non-participation.

Date: 2015
New Economics Papers: this item is included in nep-pbe
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