Pay-as-you-go contracts reduce minimum purchase requirements, which may increase market participation. This paper randomizes the introduction and price(s) of a novel pay-as-you-go contract to the California auto insurance market, where 17% of drivers are uninsured. The pay-as-you-go contract increases take-up by 10.8 p.p. (89%) and days with coverage by 4.6 days over the 3-month experiment (27%). Demand is relatively inelastic, and pay-as-you-go increases insurance coverage in part by relaxing liquidity requirements: most drivers' purchasing behavior is consistent with a cost of credit in excess of payday lending rates, and 19% of drivers have a purchase rejected for insufficient funds.
{"title":"Pay-As-You-Go Insurance: Experimental Evidence on Consumer Demand and Behavior","authors":"Raymond Kluender","doi":"10.1093/rfs/hhad080","DOIUrl":"https://doi.org/10.1093/rfs/hhad080","url":null,"abstract":"Pay-as-you-go contracts reduce minimum purchase requirements, which may increase market participation. This paper randomizes the introduction and price(s) of a novel pay-as-you-go contract to the California auto insurance market, where 17% of drivers are uninsured. The pay-as-you-go contract increases take-up by 10.8 p.p. (89%) and days with coverage by 4.6 days over the 3-month experiment (27%). Demand is relatively inelastic, and pay-as-you-go increases insurance coverage in part by relaxing liquidity requirements: most drivers' purchasing behavior is consistent with a cost of credit in excess of payday lending rates, and 19% of drivers have a purchase rejected for insufficient funds.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":"24 7","pages":""},"PeriodicalIF":8.2,"publicationDate":"2023-10-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50166190","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We test for gender bias in promotions at financial institutions using two central predictions of Becker’s (1957, 1993) model: firms with bias will (1) raise the promotion bar for marginally promoted female workers, and (2) incur costs from forgoing efficient employment practices. We find support for both of these predictions using a new nationwide panel of mortgage loan officers and their managers encompassing approximately 72,000 workers from over 1,000 shadow banks from 2014 to 2019. Overall, our findings provide evidence that gender bias is an important factor in gender gaps at financial institutions.
{"title":"Gender Bias in Promotions: Evidence from Financial Institutions","authors":"Ruidi Huang, Erik J Mayer, Darius Miller","doi":"10.1093/rfs/hhad079","DOIUrl":"https://doi.org/10.1093/rfs/hhad079","url":null,"abstract":"We test for gender bias in promotions at financial institutions using two central predictions of Becker’s (1957, 1993) model: firms with bias will (1) raise the promotion bar for marginally promoted female workers, and (2) incur costs from forgoing efficient employment practices. We find support for both of these predictions using a new nationwide panel of mortgage loan officers and their managers encompassing approximately 72,000 workers from over 1,000 shadow banks from 2014 to 2019. Overall, our findings provide evidence that gender bias is an important factor in gender gaps at financial institutions.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":"22 8","pages":""},"PeriodicalIF":8.2,"publicationDate":"2023-10-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50166204","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Basel I introduced capital requirements for undrawn commitments, but only for revolvers with an original maturity greater than one year. We use this regulatory discontinuity to estimate the impact of capital regulation on the cost and composition of credit. Following Basel I, short-term commitment fees declined relative to long-term commitments and issuance of short-term facilities increased. Our results highlight the sensitivity of credit provision to capital regulation, particularly for banks with less capital. We are able to infer that low-capital banks are willing to forego twice as much income from fees to reduce required regulatory capital by a dollar.
{"title":"The Cost of Bank Regulatory Capital","authors":"Matthew C Plosser, João A C Santos","doi":"10.1093/rfs/hhad077","DOIUrl":"https://doi.org/10.1093/rfs/hhad077","url":null,"abstract":"Basel I introduced capital requirements for undrawn commitments, but only for revolvers with an original maturity greater than one year. We use this regulatory discontinuity to estimate the impact of capital regulation on the cost and composition of credit. Following Basel I, short-term commitment fees declined relative to long-term commitments and issuance of short-term facilities increased. Our results highlight the sensitivity of credit provision to capital regulation, particularly for banks with less capital. We are able to infer that low-capital banks are willing to forego twice as much income from fees to reduce required regulatory capital by a dollar.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":"56 50","pages":""},"PeriodicalIF":8.2,"publicationDate":"2023-10-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50166284","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We analyze the distributional effects of macroprudential policy on mortgage cycles by exploiting the U.K. mortgage register and a 2014 15% limit imposed on lenders' high loan-to-income (LTI) mortgages. Constrained lenders issue fewer and more expensive high-LTI mortgages, with stronger effects on low-income borrowers. Unconstrained lenders strongly substitute high-LTI loans in local areas with higher constrained lender presence, but not high-LTI loans to low-income borrowers—consistent with adverse selection problems—implying lower overall credit to low-income borrowers. Consistently, policy-affected areas experience lower house price growth postregulation and, following the Brexit referendum (negative aggregate shock), better house price growth and lower mortgage defaults for low-income borrowers.
{"title":"Macroprudential Policy, Mortgage Cycles, and Distributional Effects: Evidence from the United Kingdom","authors":"José-Luis Peydró, Francesc Rodriguez-Tous, Jagdish Tripathy, Arzu Uluc","doi":"10.1093/rfs/hhad070","DOIUrl":"https://doi.org/10.1093/rfs/hhad070","url":null,"abstract":"We analyze the distributional effects of macroprudential policy on mortgage cycles by exploiting the U.K. mortgage register and a 2014 15% limit imposed on lenders' high loan-to-income (LTI) mortgages. Constrained lenders issue fewer and more expensive high-LTI mortgages, with stronger effects on low-income borrowers. Unconstrained lenders strongly substitute high-LTI loans in local areas with higher constrained lender presence, but not high-LTI loans to low-income borrowers—consistent with adverse selection problems—implying lower overall credit to low-income borrowers. Consistently, policy-affected areas experience lower house price growth postregulation and, following the Brexit referendum (negative aggregate shock), better house price growth and lower mortgage defaults for low-income borrowers.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":"36 12","pages":""},"PeriodicalIF":8.2,"publicationDate":"2023-09-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50166554","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Michael LaCour-Little, Andrey Pavlov, Susan Wachter
We identify two issues in the work of Ouazad and Kahn (2022). Correcting either reverses the original result. The two changes are to use the correct FHFA conforming loan limits for each county and year and to compare the individual loan amount to that limit correctly. There is no evidence that lenders transfer climate risk by altering loan origination and securitization behavior. None of our results calls into question the value and importance of the O&K model as a test for adverse selection. The question addressed and the setup of the test are important and should be replicated over time.
{"title":"Adverse Selection and Climate Risk: A Response to Ouazad and Kahn (2022)","authors":"Michael LaCour-Little, Andrey Pavlov, Susan Wachter","doi":"10.1093/rfs/hhad072","DOIUrl":"https://doi.org/10.1093/rfs/hhad072","url":null,"abstract":"We identify two issues in the work of Ouazad and Kahn (2022). Correcting either reverses the original result. The two changes are to use the correct FHFA conforming loan limits for each county and year and to compare the individual loan amount to that limit correctly. There is no evidence that lenders transfer climate risk by altering loan origination and securitization behavior. None of our results calls into question the value and importance of the O&K model as a test for adverse selection. The question addressed and the setup of the test are important and should be replicated over time.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":"38 17","pages":""},"PeriodicalIF":8.2,"publicationDate":"2023-09-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50166785","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Political frictions significantly affect both pricing and supply in the long-term care insurance (LTCI) market. Comparing the same insurer’s requests submitted for the same policy at the same time to different state regulators, we find that they are 13% more likely to be approved and receive 4% more of the requested amount after an election year. Over time, regulatory pushback on premium increase requests leads to persistently lower cash reserves and increases the probability of company dropout. An insurer who receives one-standard-deviation less of their requested increase is 20% more likely to leave the market next year.
{"title":"The Effect of Political Frictions on the Pricing and Supply of Insurance","authors":"Jessica Liu, Weiling Liu","doi":"10.1093/rfs/hhad073","DOIUrl":"https://doi.org/10.1093/rfs/hhad073","url":null,"abstract":"Political frictions significantly affect both pricing and supply in the long-term care insurance (LTCI) market. Comparing the same insurer’s requests submitted for the same policy at the same time to different state regulators, we find that they are 13% more likely to be approved and receive 4% more of the requested amount after an election year. Over time, regulatory pushback on premium increase requests leads to persistently lower cash reserves and increases the probability of company dropout. An insurer who receives one-standard-deviation less of their requested increase is 20% more likely to leave the market next year.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":"38 18","pages":""},"PeriodicalIF":8.2,"publicationDate":"2023-09-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50166784","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We exploit the staggered introduction of liability waivers when investors hold stakes in conflicting business opportunities as a shock to venture capital (VC) investment and director networks. After the law changes, we find increases in within-industry VC investment and common directors serving on startup boards. Despite the potential for rent extraction, same-industry startups inside VC portfolios benefit by raising more capital, failing less, and exiting more successfully. VC directors serving on other startup boards are the primary mechanism associated with positive outcomes, consistent with common VC investment facilitating informational exchanges in VC portfolios.
{"title":"Common Venture Capital Investors and Startup Growth","authors":"Ofer Eldar, Jillian Grennan","doi":"10.1093/rfs/hhad071","DOIUrl":"https://doi.org/10.1093/rfs/hhad071","url":null,"abstract":"We exploit the staggered introduction of liability waivers when investors hold stakes in conflicting business opportunities as a shock to venture capital (VC) investment and director networks. After the law changes, we find increases in within-industry VC investment and common directors serving on startup boards. Despite the potential for rent extraction, same-industry startups inside VC portfolios benefit by raising more capital, failing less, and exiting more successfully. VC directors serving on other startup boards are the primary mechanism associated with positive outcomes, consistent with common VC investment facilitating informational exchanges in VC portfolios.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":"38 3","pages":""},"PeriodicalIF":8.2,"publicationDate":"2023-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50166790","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Modern asset pricing models combine recursive preferences with complex dynamics for the underlying consumption process. The existence of solutions is for many of these models an unsettled question. This paper introduces a novel technique to prove existence and nonexistence, as well as uniqueness for models with recursive preferences. The approach applies to many models of interest, including those with long-run consumption risks, with stochastic volatility and jumps, with time-varying consumption disasters, and with smooth ambiguity aversion and learning. Collectively, the proven results settle the existence question for many of today’s leading asset pricing models.
{"title":"Existence of the Wealth-Consumption Ratio in Asset Pricing Models with Recursive Preferences","authors":"W. Pohl, K. Schmedders, Ole Wilms","doi":"10.1093/rfs/hhad069","DOIUrl":"https://doi.org/10.1093/rfs/hhad069","url":null,"abstract":"\u0000 Modern asset pricing models combine recursive preferences with complex dynamics for the underlying consumption process. The existence of solutions is for many of these models an unsettled question. This paper introduces a novel technique to prove existence and nonexistence, as well as uniqueness for models with recursive preferences. The approach applies to many models of interest, including those with long-run consumption risks, with stochastic volatility and jumps, with time-varying consumption disasters, and with smooth ambiguity aversion and learning. Collectively, the proven results settle the existence question for many of today’s leading asset pricing models.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":" ","pages":""},"PeriodicalIF":8.2,"publicationDate":"2023-08-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41805088","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a dynamic model of costly stock short-selling and lending market and obtain implications that simultaneously support many empirical regularities related to short-selling. In our model, investors’ belief disagreement leads to shorting demand, whereby short-sellers pay shorting fees to borrow stocks from lenders. Our main novel results are as follows. Short interest is positively related to shorting fee and predicts stock returns negatively. Higher short-selling risk can be associated with lower stock returns and less short-selling activity. Stock volatility is increased under costly short-selling. An application to GameStop episode yields implications consistent with observed patterns.
{"title":"Dynamic Equilibrium with Costly Short-Selling and Lending Market","authors":"Adem Atmaz, Suleyman Basak, Fangcheng Ruan","doi":"10.1093/rfs/hhad060","DOIUrl":"https://doi.org/10.1093/rfs/hhad060","url":null,"abstract":"We develop a dynamic model of costly stock short-selling and lending market and obtain implications that simultaneously support many empirical regularities related to short-selling. In our model, investors’ belief disagreement leads to shorting demand, whereby short-sellers pay shorting fees to borrow stocks from lenders. Our main novel results are as follows. Short interest is positively related to shorting fee and predicts stock returns negatively. Higher short-selling risk can be associated with lower stock returns and less short-selling activity. Stock volatility is increased under costly short-selling. An application to GameStop episode yields implications consistent with observed patterns.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":"36 2","pages":""},"PeriodicalIF":8.2,"publicationDate":"2023-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50167371","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Hedge fund teams with heterogeneous educational backgrounds, academic specializations, work experiences, genders, and races, outperform homogeneous teams after adjusting for risk and fund characteristics. An event study of manager team transitions, instrumental variable regressions, and an analysis of managers who simultaneously operate solo- and team-managed funds address endogeneity concerns. Diverse teams deliver superior returns by arbitraging more stock anomalies, avoiding behavioral biases, and minimizing downside risks. Moreover, diversity allows hedge funds to circumvent capacity constraints and generate persistent performance. Our results suggest that diversity adds value in asset management.
{"title":"Diverse Hedge Funds","authors":"Yan Lu, Narayan Y Naik, Melvyn Teo","doi":"10.1093/rfs/hhad064","DOIUrl":"https://doi.org/10.1093/rfs/hhad064","url":null,"abstract":"Hedge fund teams with heterogeneous educational backgrounds, academic specializations, work experiences, genders, and races, outperform homogeneous teams after adjusting for risk and fund characteristics. An event study of manager team transitions, instrumental variable regressions, and an analysis of managers who simultaneously operate solo- and team-managed funds address endogeneity concerns. Diverse teams deliver superior returns by arbitraging more stock anomalies, avoiding behavioral biases, and minimizing downside risks. Moreover, diversity allows hedge funds to circumvent capacity constraints and generate persistent performance. Our results suggest that diversity adds value in asset management.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":"34 4","pages":""},"PeriodicalIF":8.2,"publicationDate":"2023-08-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50167375","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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