This paper proceeds as follows the next section

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This paper proceeds as follows. The next section introduces our main source of data, the U.S. census, which has not yet been used to study ±nancial market participation. Sections 3, 4, and 5 examine how ±nancial market participation is a/ected by education, ±nancial literacy education, and cognitive ability, respectively. Section 6 discusses additional mechanisms through which education could a/ect participation, and section 7 concludes. 3
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2 Patterns in Financial Market Participation 2.1 Data We introduce new data for use in analyzing ±nancial market participation decisions. The U.S. census, a decennial survey conducted by the U.S. government, asks questions of households that Congress has deemed necessary to administer U.S. government programs. One out of six households is sent the ³long form,´ which includes detailed questions about an individual, including information on education, race, occupation, and income. We use a 5% sample from the Public Use Census Data, which is a random representative sample drawn from the United States population. There are several important advantages to using census data. First and foremost, by com- bining data from 1980, 1990, and 2000, our baseline speci±cation contains more than 14 million observations. This allows precise estimates, and most importantly, enables us to use instrumen- tal variable strategies that would simply not be possible with other data sets. The large sample size also allows non-parametric controls for most variables of interest, and the inclusion of state, cohort, and age ±xed-e/ects. The census does not collect any information on ±nancial wealth, but does collect detailed questions on household income. The main measure of ±nancial market participation we will use is ³income from interest, dividends, net rental income, royalty income, or income from estates and trusts,´received during the previous year which we will term ³investment income.´Households are instructed to ³report even small amounts credited to an account.´(Ruggles et al., 2004). A second type of income we use is ³retirement, survivor, or disability pensions,´ received during the previous year which we term ³retirement income.´This is distinct from Social Security and Supplemental Security Income, both of which are reported on separate lines. 1 1 Two data points deserve mention. First, one may be concerned that small amounts of investment income simply represent interest from savings accounts. As a robustness check, we rerun our analysis considering only those who receive income greater than $500 (or, alternatively, $1000) in investment income as "participating." The results are very similar (available on request). Second, to preclude the possibility of revealing personal information, the Census ³top-codes´values for very rich individuals. Speci±cally, they replace the income variable for individuals with investment income or retirement income above a year-speci±c limit with the median income of all individuals in that state earning above that limit. The limits for investment income are $75,000, $40,000 and $50,000 in 1980, 1990 and 2000 respectively.
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