Asset prices, limited stock market participation and income inequality /

Abstract

In this dissertation, the short- and long-run effects of stock price appreciation on household income inequality under limited stock market participation are empirically and theoretically studied. This is achieved by characterizing the dynamics of the income inequality between stockholders and nonstockholders using Panel Study of Income Dynamics (PSID) data and a heterogeneous agent general equilibrium model.

The main finding is that there is no trend in income inequality between stockholders and nonstockholders for the period 1980 to 2001, during which time the stock market appreciated more than five times. Obviously stock market appreciation had not contributed to the trend of the observed Gini index. In the short run, however, stock market appreciation is found to increase income inequality between stockholders and nonstockholders. The estimation method controls for household idiosyncratic unemployment as well as household demographics via a fixed-effect panel data regression model. The finding also suggests that increasing premiums of skills contributed substantially to income inequality.

The heterogeneous agent general equilibrium model shows that stock market appreciation, given limited stock market participation, has no effect on income inequality in the long run, which is consistent with the empirical findings. In the short run, the effect of stock market appreciation on income inequality is mild and depends on the type of productivity shift that causes the appreciation. Stock price appreciation that results from a total factor productivity change has less effect on income inequality than stock appreciation that results from a skill-biased technological change. The analysis also finds that increasing stock market participation of and increasing skill acquisition by nonstockholders, who are typically less skilled, could decrease the level of income inequality.