Abstract

Differences in household saving rates are a key driver of wealth inequality. But what determines these differences in saving rates and wealth accumulation? We provide a new answer to this long-standing question based on new empirical evidence and a new modeling framework. In the data, we decompose U.S. household wealth into its main portfolio components to document two new empirical facts. First, the variation in wealth by income is mainly driven by differences in participation in asset markets rather than by the amounts invested. Wealth differences are a matter of to have or not to have. Second, the large heterogeneity in asset market participation closely follows observed differences in access to asset markets. Combining these two facts, we develop a new model of life-cycle wealth accumulation in which income-dependent market access is the key driver of differences in asset market participation and saving rates by income. The calibrated model accurately captures the joint distribution of income and wealth. Eliminating heterogeneity in access to asset markets increases wealth accumulation in the bottom half of the income distribution by 32%. Facilitating access to employer-sponsored retirement accounts improves broad-based wealth accumulation in the U.S. economy. Historical data support the model’s prediction.

Keywords: Wealth Inequality; Labor Market Heterogeneity; Household Portfolios.

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