Left behind: Partisan identity, stock market participation, and wealth inequality

Abstract

This paper investigates whether and how opposing partisans differ in their wealth accumulation. Using microdata from a longitudinal U.S. household survey, I document that Democrats are on average 11% less likely than Republicans to participate in the stock market. Moreover, the partisan gap widens sharply, by 13%, under Democratic presidencies, precisely when the stock market returns are substantially higher. This dynamic pattern accounts for more than half of the discrepancy in wealth accumulation between Democrats and Republicans over presidential cycles. A decomposition exercise uncovers two underlying forces in opposite directions: while the partisan gap in stock market participation through directly held investment accounts narrows during Democratic presidencies, the narrowing gap is dominated by the widening partisan gap in stock market participation through retirement accounts during the same periods. I further provide speculative evidence that the widening gap is related to job changes, and in particular, entrepreneurship entry.