Academic journal article Journal of Economics and Finance

A Road to Assimilation: Immigrants and Financial Markets

Academic journal article Journal of Economics and Finance

A Road to Assimilation: Immigrants and Financial Markets

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1 Introduction

Economic integration of immigrants is an important issue for economists and policy makers of immigration studies. A substantial amount of literature has emerged assessing how the relative human capital (e.g., educational attainment, language ability, and health status) and labor market dynamics (e.g., earnings, occupation, and employment rates) of immigrants vary from the time they first migrate. Although financial market participation represents an important aspect of economic assimilation, little attempt has been made to study how the asset preference and investment allocation of immigrants compares to native-born residents. Few have examined specific compo- nents of wealth such as financial equity separately for groups, except in a descriptive manner (Keister 2000). Studying inequality in total wealth ignores any unique processes that generate racial-ethnic differences in specific types of wealth.

We add to this literature by conducting a detailed examination of financial asset ownership. In particular, our study examines the differences in financial asset own- ership and market participation of immigrants and native-born residents. Moreover, we establish the relationship between immigrant nativity status, their financial market participation and wealth holdings within these financial assets. We argue that since financial market participation requires a certain level of market access and the ability to synthesize available investment information, understanding the differences in investment preferences of immigrants and native-born residents can lead to more effective policies and programs aimed at mitigating the existing gap in asset owner- ship and wealth accumulation. Our study is based on the analysis of the National Longitudinal surveys, NLSY79, data set. We conduct a two-stage empirical estima- tion. In the first stage, we examine the decision to participate in financial markets using a probit model. The second stage, then, studies the correlates of amounts allocated to financial assets for immigrants and native-born residents after controlling for numerous socioeconomic, demographic, and human capital related factors. In addition to this, we also control for the nativity of respondents when analyzing the determinants of financial asset allocation among immigrants.

There are many reasons to believe that both the financial asset choice and level of financial wealth of immigrants will diverge from those of native-born residents. Many immigrants face earnings profiles that differ from native-born residents in terms of levels and earnings risk. The migration process itself leads immigrants to be a highly selected sample of individuals (Borjas 2002). Similarly, there may be a cultural basis to saving behavior (Medina et al. 1996; Carroll et al. 1994, 1999). For example, Medina et al. (1996) shows that Mexican-Americans exhibit lower willingness to delay spending money to achieve gratification. In addition, limited access to the social welfare system and the prospect of remigration may further alter immigrants' incentives for risky asset allocation (Amuedo-Dorantes and Pozo 2002; Shamsuddin and De-Voretz 1998; Dustmann 1997; Galor and Stark 1990). In addition, access to and use of financial services can affect a wide range of economic behaviors, including decisions about consumption, saving, home ownership, business formation, invest- ment and retirement. However, little is known about the financial market participation among immigrants to the United States. To what extent do they participate in mainstream financial institutions? Does their general assimilation into American society include assimilation into American financial life as well?

For example, a recent study by Rhine and Greene (2006) looks at the ownership of banking accounts among immigrants. The authors argue that, upon arrival to the United States, immigrants are immediately faced with making financial decisions and conducting transactions ranging from cashing payroll checks and paying living expenses to remitting income to family members residing in their home country. …

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