Equity culture and household behavior

Equity culture has spread among households on both sides ofthe Atlantic. We study likely effects of equity culture on thebehavior of households entering the stock market. Without borrowingconstraints, the improved prospects arising from the equitypremium tend to dominate the increase in riskiness of futureincome streams. This encourages entrants to increase consumption,borrowing, and precautionary wealth accumulation, and to reducenet financial wealth. Whether borrowing-constrained entrantswill tend to increase consumption depends on risk aversion andon constraint tightness. Borrowing constraints can reduce, eliminate,or reverse the tendency of entrants to hold larger precautionarywealth buffers.