Has Greater Stock Market Participation Increased Wealth Inequality in the US?
Household investments in risky assets, especially direct and indirect stock holdings, grew substantially between the late 1980s and 2001 in the US. A sizeable expansion of the stockholder base is often thought of as facilitating wealth enhancement and reducing wealth inequality by widening access to the equity premium. However, some commentators also point to a conflict between this inequality-reducing factor and a stock market boom that tends to widen the wealth gap between stockholders and non-stockholders. In addition, stocks are complicated and management-intensive financial instruments that create challenges for stock market entrants with limited financial sophistication and jeopardize their position in the wealth distribution. The combination of these factors makes the link between stock market participation and wealth inequality quite ambiguous.
In a recent publication*, Michael Haliassos, Professor of Macroeconomics and Finance at Goethe University, and his co-authors Yannis Bilias (Athens University of Economics and Business, AUEB) and Dimitris Georgarakos (Deutsche Bundesbank) have used three waves of the U.S. Survey of Consumer Finances to examine the period 1989-2001, characterized by large changes both in participation of US households in the stock market and in stock returns. The authors find that the movement in stock returns dominated the expansion of the stockholder base in determining the overall evolution of wealth inequality. Specifically, they do not find evidence that widening access to the stock market during this period was associated with a progressively less unequal distribution of either stock wealth or net wealth among US households. Also, they were able to show that especially smaller investors were drawn into the pool during the stock market boom in the late 1990s, but bigger investors stayed in following the internet bubble burst.
The results show that a significant part of the relevant changes in the composition of the stockholder pool refers to changes in investors’ financial attitudes and practices likely to be linked to financial literacy and sophistication. Consistent with this finding, there is accumulating evidence of differential financial sophistication and tendency of certain demographic groups to mishandle stock investments. By highlighting the importance of household characteristics, their financial attitudes and practices for net wealth inequality, this publication contributes to the debate on the importance of financial education, advice, and well-designed default options
* Bilias, Y., Georgarakos, D., Haliassos, M. (2015): “Has Greater Stock Market Participation Increased Wealth Inequality in the US?”, forthcoming in the Review of Income and Wealth.