Investment Opportunities and the Sources of Lifetime Inequality (joint with Kartik Athreya, Urvi Neelakantan and Ivan Vidangos)

Abstract

The historically high college wage premium and the perennially high equity premium on stocks raise a natural question: Are college and the stock market (two high-yield, but risky, investment opportunities) currently acting to exacerbate initial disparities in household conditions, or are they allowing those initially disadvantaged to at least partially catch up? We approach this question with a rich life cycle model featuring empirically-plausible ex-ante heterogeneity in learning ability, initial human capital, and initial wealth and, importantly, detail on the features of college, the stock market, and the financing of investments in them.

We show that the opportunity to invest in college, on net, increases 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. Finally, 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 inequality and the contributions of initial conditions, college, and stocks.