Location Choice, Portfolio Choice

Abstract

Households hold undiversified stock portfolios of firms headquartered near their city of residence. Leading explanations assign a causal role for proximity. The literature neglects that distance is endogenous. Households may locate based on unobservables such as optimism about a city's economic prospects, which can be correlated with latent local-stock demand. We use location choice models to account for this selection. We propose as instruments that older households prefer to locate in recreational areas for non-pecuniary reasons. Our analysis based on a widely used household dataset yields significantly smaller estimates for proximity in determining portfolio choice compared to those in the literature.

Keywords: Location Choice, Portfolio Choice, Household Finance, Local Bias, Selection Correction

JEL Classification: D1, G02, G1, G11, G12