Abstract
While human capital accumulation is significant early in life, stock market participation is limited. As individuals age, this pattern is reversed. In this paper, we show that—when disciplined to match the substantial heterogeneity observed in earnings—a life-cycle portfolio choice model augmented to allow human capital investment delivers stock market participation over the life-cycle consistent with the data. Key to our finding is that returns to human capital, unlike those to stocks, depend on both individual characteristics and the amount of time invested. Our results also suggest that when human capital accumulation is endogenous, it is short sales constraints on stocks, and not borrowing constraints, that limit engagement with the stock market.
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