Clustering Fosters Investment: Local Agglomeration and Household Portfolio Choice
49 Pages Posted: 15 Mar 2019 Last revised: 16 Apr 2019
Date Written: February 26, 2019
We investigate the impact of local agglomeration economies on household portfolio choice. Using detailed location and employment data from two U.S. household surveys, we document that individuals who work in locally agglomerated industries are more likely to invest in risky assets. This pattern cannot be explained by households sorting on latent factors, local employers' stock compensation and pension policies, or investors' local biases. Instead, the relation between local agglomeration and portfolio decisions is consistent with industry clusters enhancing human capital and in turn, raising workers' effective risk tolerance. Our findings highlight the role of geography in shaping household financial decisions.
Keywords: local agglomeration, household portfolio choice, human capital
JEL Classification: G11, J24, R23
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