Skills, Education and Wealth Inequality

64 Pages Posted: 13 Aug 2023

See all articles by Elisa Castagno

Elisa Castagno

CHILD - Collegio Carlo Alberto

Raffaele Corvino

University of Torino & CERP

Francesco Ruggiero

Bank of Italy

Date Written: August 12, 2023

Abstract

We study the link between individual skills, education, and wealth inequality through the channel of financial investment decisions. We present a simple model of individuals with heterogeneous ability in evaluating investment opportunities and a welfare-maximizing policymaker who subsidizes education using taxes on capital income. The key model insight reveals that education improves individuals’ evaluation skills and prevents otherwise unskilled investors from making detrimental investment decisions, thus closing the gap between the top and bottom tails of wealth distribution. We provide consistent empirical evidence using individual-level data from the Dutch Household Survey (DHS). We document a positive and sizeable effect of education on both the level and returns to wealth due to the impact of education on stock market participation, after controlling for unobserved, individual ability. Our results suggest that policymakers can exploit the role of education to alleviate wealth inequality by promoting the stock market participation of unskilled individuals.

Keywords: Education, Inequality, Unobserved Ability, Financial Investments, Returns

JEL Classification: I24, I26, I28, H30, H52

Suggested Citation

Castagno, Elisa and Corvino, Raffaele and Ruggiero, Francesco, Skills, Education and Wealth Inequality (August 12, 2023). Available at SSRN: https://ssrn.com/abstract=4539267 or http://dx.doi.org/10.2139/ssrn.4539267

Elisa Castagno

CHILD - Collegio Carlo Alberto

Raffaele Corvino (Contact Author)

University of Torino & CERP ( email )

Corso Unione Sovietica 218bis
Piazza Arbarello 8
Torino, 10134
Italy
+39 3465316931 (Phone)

HOME PAGE: http://raffaelecorvino.com

Francesco Ruggiero

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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