Human Capital and Household Portfolios (joint with Kartik Athreya and Urvi Neelakantan)

Abstract

Portfolio choice models counterfactually predict (or advise) almost universal equity market participation and a high share for equity in wealth early in life. Empirically consistent predictions have proved elusive without transactions costs,

infomational frictions, or nonstandard preferences. We demonstrate that once human capital investment is allowed, standard theory predicts portfolio choices much closer to those empirically observed. Two intuitive mechanisms are at work:

For participation, human capital returns exceed financial asset returns most young households. This relationship reverses as households age. For shares, risks to human capital limit the household’s desire to hold wealth in risky financial equity.