The Role of Labor-Income Risk in Household Risk-Taking?
119 Pages Posted: 4 Sep 2020
Date Written: July 26, 2020
In fifteen European countries, China, and the US, stocks and business equity as a share of total household assets are represented by an increasing and convex function of income/wealth. A parsimonious model fitted to the data shows why background labor- income risk can explain much of this risk-taking pattern. Uncontrollable labor-income risk stresses middle-income households more because labor income is a larger fraction of their total lifetime resources compared with the rich. In response, middle-income households re-duce (controllable) financial risk. Richer households, having less pressure, can afford more risk-taking. The poor take low risk because they avoid jeopardizing their subsistence consumption.
Keywords: background risk, household-portfolio shares, business equity, subsistence consumption, wealth inequality
JEL Classification: G11, D91, D81, D14, D11, E21
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