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The empirical evidence on stock market participation and portfolio choice defies the predictions of standard life-cycle theory. In this paper, the author develops and estimate a model of portfolio choice that can account for the limited stock market participation and substantial portfolio diversification seen in the data. The author presents three realistic extensions to the basic framework: per period fixed costs, public pension provision, and a small chance of a disastrous event in the stock market. The estimated model is able to explain observed patterns at reasonable wealth levels, while keeping to a fairly simple framework.
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