Household Finance: Education, Permanent Income and Portfolio Choice
NBER Working Paper No. 19455
This paper studies household financial choices: why are these decisions dependent on the education level of the household? A life cycle model is constructed to understand a rich set of facts about decisions of households with different levels of education attainment regarding stock market participation, stock share in wealth, stock adjustment rate and wealth-income ratio. The model, including preferences and both participation and portfolio adjustment costs, is estimated to match the asset allocation decisions of different education groups. Using the estimated parameters we argue that education matters for financial decisions mainly through its effect on mean income. We also study the sensitivity of household financial decisions to: (i) government programs that support consumption floors and (ii) changes in reimbursement for medical expenditures.
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