Limited Stock Market Participation Among Renters and Home Owners

Abstract

The stock market participation rate among homeowners is twice as high as among renters. This paper builds a life-cycle portfolio choice model with endogenous housing tenure choice. A stylized form of preference heterogeneity generates a substantial difference in participation rates. A majority of households have a large savings motive and choose to be homeowners and participate. A minority of households have a small savings motive and find it less worthwhile to participate. Fewer of these households become homeowners. Difference-in-difference regressions on panel data do not find evidence of a crowding out effect of homeownership on participation, supporting the message that preference heterogeneity matters.

Keywords: Limited Participation, Home Ownership, Household Finance

JEL Classification: G11, E44, D91, E21