Gambling on Education : Investment Skills and Wealth Inequality

We study the link between 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. We show that a welfare maximizing policy-maker can reduce inequality by supplying public, free education. The key model insight is that education improves individual evaluation skills and prevents the otherwise unskilled investors from holding on detrimental investment decisions, thus ultimately closing the gap between the top and the bottom tails of the wealth distribution. We find clear-cut empirical evidence consistent with our model predictions. We document that inequality spiked during the net economy boom of late 90s, when only the more competent individuals twisted effectively their portfolio towards the stock market. The paper delivers an important policy implication to tackle the worldwide limited stock market participation and huge wealth inequality observed in the data