Why Do Household Portfolio Shares Rise in Wealth?∗

Abstract

In the cross-section of households, the portfolio share rises in wealth and has a non-decreasing age profile. The standard life-cycle model with homothetic utility and non-tradable labor income has the counterfactual implication that the portfolio share falls in both wealth and age. We develop a life-cycle model in which households have nonhomothetic utility over two types of consumption goods, basic and luxury. The nonhomothetic model predicts that the basic expenditure share falls in total consumption. When calibrated to match the cross-sectional variation in the basic expenditure share, this model explains the empirical evidence on portfolio choice. JEL classification: D11; D12; G11

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Cite this paper

@inproceedings{Wachter2007WhyDH, title={Why Do Household Portfolio Shares Rise in Wealth?∗}, author={Jessica A. Wachter and Motohiro Yogo}, year={2007} }