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Abstract

The topic of long-standing US racial inequality is experiencing a revival in mainstream economics literature. Numerous studies released in recent years document the prevalence and persistence of racial gaps across several economic domains, analyze the heterogeneous impact of policies across racial groups, or develop new theoretical frameworks for understanding racial gaps. This paper makes a timely intervention in this last literature, focusing on one of the most striking forms of racial inequality, the Black-White wealth gap. This paper models the persistence of racial wealth inequality as arising from endogenous beliefs about returns on risky assets. In the authors’ model, beliefs update through learning, which is assumed to occur solely through participation in the market for risky assets (an assumption that is later relaxed to allow for learning through social networks). In the model setup, Black and White households hold equally pessimistic initial beliefs. During slavery, capital returns were very high—high enough that the expected gains exceeded that of eschewing investment even when beliefs were pessimistic. Under these circumstances, White households participated in risky asset markets and thus learned more about the true distribution of good and bad outcomes after investment. But because slavery barred Black Americans from participation in labor and capital markets, onlyWhite households were able to experiment and thus update their beliefs about returns. After slavery, Black Americans could in theory participate, but by then, returns had fallen and were no longer sufficiently