Causes of Portfolio Heterogeneity

• Applicant: Professor Dr. Moritz Kuhn
• Subject Area: Economic Theory ; Economic Policy, Applied Economics
• Term: since 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 536258979

High and rising wealth inequality is one of the defining topics of the 21st century. A secular trend of rising asset prices and at times turbulent movements in asset markets have brought asset prices and portfolio differences to the forefront of the debate on wealth inequality and wealth accumulation. With record levels of household wealth relative to household income, asset price movements can now shift wealth in days or weeks to an extent that in the past would have required the savings efforts of generations. This new economic environment requires researchers to develop a better understanding of the determinants of portfolio choice. Rising balances in private pension plans, policies to encourage homeownership, and government encouragement of stock market participation make questions about portfolio choice and participation in asset markets even more pressing for the future. Existing macroeconomic models of consumption-saving behavior, with saving out of income into a single asset, will not be able to provide the necessary answers. I will provide new answers to the open questions and contribute to a better understanding of the sources of heterogeneity in portfolio choice. To provide new answers, I will analyze rich and novel microdata and develop new models of portfolio choice with rich heterogeneity. My contribution to the extension of theoretical frameworks will be guided by the empirical evidence from the microdata analyzed in this project. On the empirical side, I will also rely on novel data to document empirical facts for a better understanding of the sources of differences in portfolio choice. In three separate parts of the project, I will consider novel or little-studied determinants of portfolio choice and explore their quantitative importance. Part 1 studies how heterogeneity in employment stability affects portfolio choice and asset market participation. In this part, I will study microdata on labor market dynamics and portfolio choice and develop a model framework to interpret the new empirical results. Part 2 uses theoretical results on consumption commitments to ask how such commitments affect portfolio choice in the data, and I develop a quantitative model to explore the consequences of consumption commitments for heterogeneity in portfolio choice. Part 3 uses novel microdata to extend the idea that trust in the financial market and its agents is an important determinant of portfolio choice. In each of the three parts, I will also explore implications for the design of economic policies to promote financial inclusion and broad-based wealth accumulation.

• DFG Programme: Research Grants