by Elisa Castagno, Raffaele Corvino, Francesco Ruggiero; CERP WP N. 215/23
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 poli- cymaker who subsidizes education using taxes on capital income. The key model insight re- veals 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.
Published: November 2023