MyMoney Resources - Researcher

Abstract: I test the credit-market effects of housing wealth shocks by estimating the consumption elasticity of house price shocks among households in different age quintiles. Younger households face faster expected income growth and hence would like to borrow more than older households. I estimate consumption elasticities from housing wealth by age quintile to be {4; 0; 3; 8; 3} percent. As predicted by theory, the youngest group has a higher elasticity of consumption than the next two age quintiles. That the consumption of the age quintile on the verge of retirement is responsive to housing wealth is also not surprising: I show that these households are likeliest to "downsize" their house and thus realize any capital gains.

Abstract: Economists disagree whether the recent increase in credit card debt has been detrimental to U.S. households. However, many rely on a measure of revolving credit published by the Federal Reserve, which captures transactions in which a credit card is used because of its advantages over cash or a check. An increase in debt stemming from such convenience use likely would not signal greater financial vulnerabiltiy for households. In this paper, I present evidence that some of the significant increase in both the level of credit card debt and its growth from 1992 to 2001 was due to convenience use.

Abstract: Using a unique set of household level panel data, we estimate the effect of capital gains on saving by asset type, controlling for observable and unobservable household specific fixed effects. The results suggest that the decline in the personal saving rate since 1984 is largely due to the significant capital gains in corporate equities experienced over this period. Over five-year periods, the effect of capital gains in corporate equities on saving is substantially larger than the effect of capital gains in housing or other assets. Failure to differentiate wealth affects across asset types results in a significant understatement or overstatement of the size of their impact, depending on the asset.

Abstract: The key feature of the modern U.S. personal bankruptcy law is to provide debtors a financial fresh start through debt discharge. The primary justification for the discharge policy is to preserve human capital by maintaining incentives for work. In this paper, we test this fresh start argument by providing the first estimate of the effect of personal bankruptcy filing on the labor supply using data from the Panel Study of Income Dynamics (PSID). Our econometric approach controls for the endogenous self-selection of bankruptcy filing and allows for dependence over time for the same household. We find that filing for bankruptcy does not have a positive impact on annual hours worked by bankrupt households, a result mainly due to the wealth effects of debt discharge. The finding is robust to a number of alternative model specifications and sample selections. Therefore, our analysis does not find supporting evidence for the human capital argument for bankruptcy discharge.

This paper investigates three common differences among defined contribution plans that may lead to varying degrees of information overload. We hypothesize that information overload is one reason participants in defined contribution plans often choose the default options. In two experiments, we manipulate the display of the investment information, the number of choices offered, and the similarity between the investment options offered. In addition, we measure all of the participants’ financial knowledge and include this measure as an independent variable in the study. We test how these plan changes and the individual’s financial knowledge influence the participant’s feelings of information overload, decision satisfaction and choice of the default. The main contribution of this analysis is that it explores the interaction between the individual’s tested financial knowledge and the manipulated plan features. The findings suggest that the success of certain plan features depends strongly on the financial background of the participant and raises important concerns about financial education.

This paper investigates the determinants of holding different types of equities in the context of a 401(k) retirement plan. The decision of holding a given type of equity fund is related to investor characteristics and common effects.The results of this paper should be relevant for academics, in their effort to produce models that may explain or guide actual portfolio choices. The results of this paper should also be useful to policymakers, who may be concerned with the impact of a possible reform of the Social Security system on households’ finances and on financial markets. We find that the average equity portfolio is reasonably allocated: 45% in Large Equities, 32% in Small/Medium Equities, and 22% in International Equities. For most of the investors/year observations, 74% of the observations, investors hold all three equity funds. Hence, for the most part investors take advantage of the diversification options available in the plan.

This report presents the results of a study that uses a controlled experiment with over 500 recent mortgage customers to examine the mortgage broker compensation disclosure proposed by the Department of Housing and Urban Development (HUD) as part of its July 2002 RESPA reform proposal. The focus of the disclosure is on any “yield spread premium” paid by the lender to the broker for loans originated with “above par” interest rates. The study finds that the disclosure is likely to confuse consumers, cause a significant proportion to choose loans that are more expensive than the available alternatives, and create a substantial consumer bias against broker loans, even when the broker loans cost the same or less than direct lender loans. The report concludes that a better way to help consumers obtain less expensive mortgages would be to encourage and facilitate consumer comparison shopping on loan costs.

Abstract: This paper explores the significance of unobservable default risk in mortgage and automobile loan markets. I develop and estimate a two-period model that allows for heterogeneous forms of simultaneous adverse selection and moral hazard. Controlling for income levels, loan size and risk aversion, I find robust evidence of adverse selection, with borrowers self-selecting into contracts with varying interest rates and collateral requirements. For example, ex-post higher-risk borrowers pledge less collateral and pay higher interest rates. Moreover, there is strongly suggestive evidence of moral hazard such that collateral is used to induce a borrower's effort to avoid repayment problems. Thus, loan terms may have a feedback effect on behavior. Also, higher-risk borrowers are more difficult to induce into exerting effort, explaining the counter-intuitive result that higher-risk borrowers sometimes pay lower interest rates than observably lower-risk borrowers.