Investor Sophistication and Capital Income Inequality
64 Pages Posted: 22 Aug 2015 Last revised: 14 Feb 2019
Date Written: September 28, 2018
Capital income inequality is large and growing fast, accounting for a significant portion of total income inequality. We study its growth in a general equilibrium portfolio choice model with endogenous information acquisition and heterogeneity across household sophistication and asset riskiness. The model implies capital income inequality that grows with aggregate information technology. Investors di↵erentially adjust both the size and composition of their portfolios, as unsophisticated investors retrench from trading risky securities and shift their portfolios toward safer assets. Technological progress also reduces aggregate returns and increases the volume of transactions, features that are consistent with recent U.S. data.
Keywords: inequality, technological progress, capital income
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