This paper investigates the efficiency of household investment decisions in a unique dataset containing the disaggregated wealth and income of the entire population of Sweden. The analysis focuses on two main sources of inefficiency in the financial portfolio: underdiversification of risky assets (“down”) and nonparticipation in risky asset markets (“out”). We find that while a few households are very poorly diversified, the cost of diversification mistakes is quite modest for most of the population. For instance, a majority of participating Swedish households are sufficiently diversified internationally to outperform the Sharpe ratio of their domestic stock market. We document that households with greater financial sophistication tend to invest more efficiently but also more aggressively, so the welfare cost of portfolio inefficiency tends to be greater for these households. The welfare cost of nonparticipation is smaller by almost one half when we take account of the fact that nonparticipants would be unlikely to invest efficientlyiftheyparticipatedinrisky asset markets.

Institutional investors exhibit substantial home-state bias in private equity. This effect is particularly pronounced for public pension funds, where overweighting amounts to 9.7 % of aggregate private-equity investments and 16.2 % for the average limited partner. Public pension funds ’ in-state investments underperform by 2-4 percentage points, achieving worse performance than both their own out-of-state investments and investments in their state by out-of-state investors. Overweighting in home state investments by public pension funds is greater in states with political climates characterized by more selfdealing, although local investments perform as poorly in these states as in other states. Relative to the performance of the rest of the private equity universe, overweighting and underperformance in local investments reduce public pension fund resources by $1.2 billion per year.

Despite the dramatic reduction in explicit barriers to international investment activity over the last 60 years, the impact of financial globalization has been surprisingly limited. I argue that country attributes are still critical to financial decision-making because of “twin agency problems ” that arise because rulers of sovereign states and corporate insiders pursue their own interests at the expense of outside investors. When these twin agency problems are significant, diffuse ownership is inefficient and corporate insiders must co-invest with other investors, retaining substantial equity. The resulting ownership concentration limits economic growth, financial development, and the ability of a country to take advantage of financial globalization. AT THE END OF WORLD WAR II, the financial markets of most countries were closed to cross-border trade in financial assets. Since then, many countries have sharply reduced such barriers. The liberalization of trade in financial assets is often called “financial globalization.” In neoclassical models, financial globalization generates major economic benefits.