Investment Opportunities and the Sources of Lifetime Inequality

The historically high college wage premium and the perennially high equity premium on stocks raise a natural question: Are college and the stock market serving as vehicles to allow

individuals to escape adverse initial conditions, or mainly perpetuating disparities in endowments? We approach this question with a rich life-cycle model featuring empirically-plausible

ex-ante heterogeneit y in learning ability, initial human capital, and initial wealth as well as the options to invest in college and in stocks. We show that the opportunity to invest in college, on net, increases lifetime inequality while, perhaps surprisingly, the stock market serves to lower it. Both college and the stock market reduce the contribution of initial conditions to lifetime inequality. College, however, raises the importance of learning ability relative to other initial conditions. Furthermore, we assess the importance of the magnitudes of college—and equity—premia for inequality and its sources. We find that the change in these premia relative to their levels in the 1970s alters non-trivially inequality and the contributions of initial conditions, college, and stocks.