Wealth and Portfolio Composition: Theory and Evidence

We examine a survey of 6010 U.S. households and estimate a model for household portfolio allocation. We extend the conventional portfolio choice model in order to capture the observed incompleteness of household portfolios. We show that the empirical spe-cification of the joint discrete and continuous choice that characterizes household portfolio behavior is a switching regressions model with endogenous switching. We go on to examine the impact of taxes on portfolio composition, using detailed survey data to calculate precisely the marginal tax rate facing each household. Finally, we estimate wealth elasticities of demand for a range of assets and liabilities. Ó 1998 Elsevier Science S.A