Samantha Horn, Julian C. Jamison, Dean S. Karlan, Jonathan Zinman
Is financial knowledge change necessary for lasting savings behavior change? Or, akin to the canonical Friedman billiards player, can behavior persist “as if” such knowledge is held? We randomize 240 Ugandan young-adult clubs to financial education, savings account access, both, or neither. Each education arm, but not the account-only arm, increases financial knowledge and trust in banks at one-year. But at five-years the knowledge effects disappear, and the trust effects diminish. Savings activity, wealth, and income increase at both one-year and five-years for all treatment arms, suggesting that knowledge change is unnecessary for lasting impacts on behavior and outcomes.
{"title":"Does Lasting Behavior Change Require Knowledge Change? Evidence from Savings Interventions for Young Adults","authors":"Samantha Horn, Julian C. Jamison, Dean S. Karlan, Jonathan Zinman","doi":"10.2139/ssrn.3710862","DOIUrl":"https://doi.org/10.2139/ssrn.3710862","url":null,"abstract":"Is financial knowledge change necessary for lasting savings behavior change? Or, akin to the canonical Friedman billiards player, can behavior persist “as if” such knowledge is held? We randomize 240 Ugandan young-adult clubs to financial education, savings account access, both, or neither. Each education arm, but not the account-only arm, increases financial knowledge and trust in banks at one-year. But at five-years the knowledge effects disappear, and the trust effects diminish. Savings activity, wealth, and income increase at both one-year and five-years for all treatment arms, suggesting that knowledge change is unnecessary for lasting impacts on behavior and outcomes.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133589399","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
US counties with higher population growth prior to 2000, experienced higher growth in residential construction in the run-up to the financial crisis of 2007-08. Banks operating in these counties shifted their loan portfolios more aggressively towards construction loans and away from other non-real estate loans. Although shifts towards construction lending that followed local construction activity did not lead to higher loan default rates, more aggressive shifts did.
{"title":"Population Growth, Building, and Banking","authors":"A. Antoniades","doi":"10.2139/ssrn.3701501","DOIUrl":"https://doi.org/10.2139/ssrn.3701501","url":null,"abstract":"US counties with higher population growth prior to 2000, experienced higher growth in residential construction in the run-up to the financial crisis of 2007-08. Banks operating in these counties shifted their loan portfolios more aggressively towards construction loans and away from other non-real estate loans. Although shifts towards construction lending that followed local construction activity did not lead to higher loan default rates, more aggressive shifts did.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"132 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122173353","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the design of dealer compensation policy in the indirect auto lending market, where most lenders give dealers the discretion to mark up interest rates. To protect consumers from potential discrimination by the dealer discretion, several banks switched to a new compensation scheme by fixing the markup as a percentage of the loan amount. We document that the market share of these banks responded positively (negatively) in the consumer segment where the policy increased (decreased) the interest rate — a reversal of the usual demand curve — which highlights the influence of dealers on the bank choice for financing loans. Accordingly, we develop and estimate an empirical model that allows for dealer–consumer bargaining, which depends on both the dealers' and the consumers' utility. Based on the estimation results, we explore alternative compensation policies that also eliminate dealers' discretion. We show that a lump-sum compensation that pays dealers a fixed dollar amount per loan dominates the current policy for the banks in terms of gaining market share. This is because dealers' equivalent markup rates would better align with their bargaining power. Our study highlights the importance of accounting for the interests and bargaining power of middlemen in designing a compensation scheme.
{"title":"Designing Dealer Compensation in the Auto Loan Market: Implications from a Policy Experiment","authors":"Zhenling Jiang, Y. Wei, T. Chan, Naser Hamdi","doi":"10.2139/ssrn.3702092","DOIUrl":"https://doi.org/10.2139/ssrn.3702092","url":null,"abstract":"We study the design of dealer compensation policy in the indirect auto lending market, where most lenders give dealers the discretion to mark up interest rates. To protect consumers from potential discrimination by the dealer discretion, several banks switched to a new compensation scheme by fixing the markup as a percentage of the loan amount. We document that the market share of these banks responded positively (negatively) in the consumer segment where the policy increased (decreased) the interest rate — a reversal of the usual demand curve — which highlights the influence of dealers on the bank choice for financing loans. Accordingly, we develop and estimate an empirical model that allows for dealer–consumer bargaining, which depends on both the dealers' and the consumers' utility. Based on the estimation results, we explore alternative compensation policies that also eliminate dealers' discretion. We show that a lump-sum compensation that pays dealers a fixed dollar amount per loan dominates the current policy for the banks in terms of gaining market share. This is because dealers' equivalent markup rates would better align with their bargaining power. Our study highlights the importance of accounting for the interests and bargaining power of middlemen in designing a compensation scheme.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"60 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120848294","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Conventional wisdom holds that multiperiod portfolio optimization problems are best, if not only, solved by dynamic programming. But dynamic programming suffers from the curse of dimensionality whereby optimization becomes intractable as time horizon and number of assets increase, thereby limiting its practical applications. In this paper I show for a classic multiperiod investment problem that a feed-forward, open-loop procedure, amenable to solution by conventional methods (e.g. calculus of variations) and not subject to the curse of dimensionality, generates `here and now' portfolios identical to those generated by the dynamic programming approach. The analytic results in this paper demonstrate that for this classic problem a feed forward approach is not inferior to the more common backward induction approach, suggesting that an `open-loop with recourse' process is a viable closed-loop approach for some practically useful multiperiod investment problems.
{"title":"A Case Study in Multiperiod Portfolio Optimization: A Classic Problem Revisited","authors":"M. Tarlie","doi":"10.2139/ssrn.3697948","DOIUrl":"https://doi.org/10.2139/ssrn.3697948","url":null,"abstract":"Conventional wisdom holds that multiperiod portfolio optimization problems are best, if not only, solved by dynamic programming. But dynamic programming suffers from the curse of dimensionality whereby optimization becomes intractable as time horizon and number of assets increase, thereby limiting its practical applications. In this paper I show for a classic multiperiod investment problem that a feed-forward, open-loop procedure, amenable to solution by conventional methods (e.g. calculus of variations) and not subject to the curse of dimensionality, generates `here and now' portfolios identical to those generated by the dynamic programming approach. The analytic results in this paper demonstrate that for this classic problem a feed forward approach is not inferior to the more common backward induction approach, suggesting that an `open-loop with recourse' process is a viable closed-loop approach for some practically useful multiperiod investment problems.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130460991","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the usage of reverse mortgages among mortgage borrowers, as well as rejected applicants for new mortgage credit who are age 62+. We find that 17-27 percent of actual and rejected borrowers would have qualified for a HECM reverse mortgage, or nine to 14 times the size of the actual HECM market. The existence of a large number of seniors with an existing mortgage or taking out a new mortgage with quite high LTVs (57-65%, depending on the product) suggests that many seniors do, in fact utilize home equity in order to fund their retirement. Yet they choose products that require monthly payments lasting decades into retirement and rising as a share of (declining) income as they age. We consider a number of possible explanations for why seniors in the US do not spend home equity and rely on loans with high payments, including precautionary savings for health shocks, bequest motives, high costs of reverse mortgages, and the lack of brand name institutions in the reverse mortgage business.
{"title":"The Market for Reverse Mortgages among Older Americans","authors":"C. Mayer, Stephanie Moulton","doi":"10.2139/ssrn.3693460","DOIUrl":"https://doi.org/10.2139/ssrn.3693460","url":null,"abstract":"This paper examines the usage of reverse mortgages among mortgage borrowers, as well as rejected applicants for new mortgage credit who are age 62+. We find that 17-27 percent of actual and rejected borrowers would have qualified for a HECM reverse mortgage, or nine to 14 times the size of the actual HECM market. The existence of a large number of seniors with an existing mortgage or taking out a new mortgage with quite high LTVs (57-65%, depending on the product) suggests that many seniors do, in fact utilize home equity in order to fund their retirement. Yet they choose products that require monthly payments lasting decades into retirement and rising as a share of (declining) income as they age. We consider a number of possible explanations for why seniors in the US do not spend home equity and rely on loans with high payments, including precautionary savings for health shocks, bequest motives, high costs of reverse mortgages, and the lack of brand name institutions in the reverse mortgage business.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115502666","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies a life-cycle model economy in which agents utilize idiosyncratic information to forecast personal income risk. Agents either inherit full information (``dynastic households") or learn to forecast lifetime income using personal employment data given incorrect initial beliefs (``non-dynastic households"). We find that the distribution of initial beliefs regarding the transition probabilities into and out of unemployment greatly impact both aggregate savings and the stationary wealth distribution in a simple model economy. The wealth Gini coefficient in a model economy comprised solely of dynastic agents is 18%-52% lower than in the simulations with both dynastic and non-dynastic households. Optimistic households accumulate less wealth and are more likely to enter states of unemployment with little or no savings and pessimistic households over-accumulate wealth relative to households who inherit correct beliefs. Further, our framework shows how the welfare of rational agents and the value of holding correct beliefs depends on the beliefs of other agents.
{"title":"The Distributional Consequences of Belief Heterogeneity","authors":"Nigel McClung","doi":"10.2139/ssrn.3654113","DOIUrl":"https://doi.org/10.2139/ssrn.3654113","url":null,"abstract":"This paper studies a life-cycle model economy in which agents utilize idiosyncratic information to forecast personal income risk. Agents either inherit full information (``dynastic households\") or learn to forecast lifetime income using personal employment data given incorrect initial beliefs (``non-dynastic households\"). We find that the distribution of initial beliefs regarding the transition probabilities into and out of unemployment greatly impact both aggregate savings and the stationary wealth distribution in a simple model economy. The wealth Gini coefficient in a model economy comprised solely of dynastic agents is 18%-52% lower than in the simulations with both dynastic and non-dynastic households. Optimistic households accumulate less wealth and are more likely to enter states of unemployment with little or no savings and pessimistic households over-accumulate wealth relative to households who inherit correct beliefs. Further, our framework shows how the welfare of rational agents and the value of holding correct beliefs depends on the beliefs of other agents.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"215 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121321339","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract Using information on climate transition risks embedded in US equity mutual fund portfolios, we report evidence that mutual fund investors consider climate-related transition risk to be an undesirable fund feature and accordingly allocate more money to funds with lower climate-related transition risk. The size of the impact of this risk on fund flows differs depending on the performance expectations of investors and the socially responsible focus and sustainability of the fund. Our results suggest that mutual fund investors are aware of climate-related transition risks as evidenced by their investment decisions.
{"title":"Are Investors Aware of Climate-Related Transition Risks? Evidence from Mutual Fund Flows","authors":"J. Reboredo, L. Otero","doi":"10.2139/ssrn.3685675","DOIUrl":"https://doi.org/10.2139/ssrn.3685675","url":null,"abstract":"Abstract Using information on climate transition risks embedded in US equity mutual fund portfolios, we report evidence that mutual fund investors consider climate-related transition risk to be an undesirable fund feature and accordingly allocate more money to funds with lower climate-related transition risk. The size of the impact of this risk on fund flows differs depending on the performance expectations of investors and the socially responsible focus and sustainability of the fund. Our results suggest that mutual fund investors are aware of climate-related transition risks as evidenced by their investment decisions.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122542572","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper documents large differences in mortgage prepayment behavior across racial and ethnic groups in the United States, which have significant implications for monetary policy, inequality, and pricing. Using a novel data set that combines administrative data on mortgage performance with information on race and ethnicity, we show that Black and Hispanic white borrowers have significantly lower prepayment rates compared with Non-Hispanic white borrowers, holding income, credit score, and equity constant. This gap is on the order of 50 percent and largely reflects different sensitivities to movements in market interest rates, and was particularly pronounced during QE1. Differences in prepayment speeds result in large disparities between white and minority borrowers in the distribution of rates paid on outstanding mortgages, which widens during periods of low mortgage rates and high refinance volumes. From 2010 to 2014, Black borrowers were paying 30 to 45 basis points more on average than Non-Hispanic whites despite only a small gap of about 5 basis points between the groups at the time of mortgage origination. The large differences in prepayment behavior have important pricing implications, as they suggest that minority borrowers are overpaying for their prepayment option. Our results show that inequality in mortgage markets is larger than previously realized and is exacerbated by expansionary monetary policy.
{"title":"Mortgage Prepayment, Race, and Monetary Policy","authors":"Kristopher Gerardi, P. Willen, D. Zhang","doi":"10.2139/ssrn.3697625","DOIUrl":"https://doi.org/10.2139/ssrn.3697625","url":null,"abstract":"This paper documents large differences in mortgage prepayment behavior across racial and ethnic groups in the United States, which have significant implications for monetary policy, inequality, and pricing. Using a novel data set that combines administrative data on mortgage performance with information on race and ethnicity, we show that Black and Hispanic white borrowers have significantly lower prepayment rates compared with Non-Hispanic white borrowers, holding income, credit score, and equity constant. This gap is on the order of 50 percent and largely reflects different sensitivities to movements in market interest rates, and was particularly pronounced during QE1. Differences in prepayment speeds result in large disparities between white and minority borrowers in the distribution of rates paid on outstanding mortgages, which widens during periods of low mortgage rates and high refinance volumes. From 2010 to 2014, Black borrowers were paying 30 to 45 basis points more on average than Non-Hispanic whites despite only a small gap of about 5 basis points between the groups at the time of mortgage origination. The large differences in prepayment behavior have important pricing implications, as they suggest that minority borrowers are overpaying for their prepayment option. Our results show that inequality in mortgage markets is larger than previously realized and is exacerbated by expansionary monetary policy.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125395418","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we explore the role of education in household FinTech adoption. Using representative nationwide household data from the 2017 China Household Finance Survey, we employ the change in China’s compulsory schooling law in the 1980s as an instrumental variable for educational attainment. We find that among Chinese households, education has statistically significant and economically important effects on the use of various FinTech services, including digital banking, mobile payment, digital wealth management, and digital consumer credit. Further analysis indicates that exogeneous increases in education lead to higher levels of financial literacy and social trust, both of which are potential drivers of FinTech adoption. Our findings provide new insights into the importance of education for household financial decision making and technology adoption.
{"title":"Education and FinTech Adoption: Evidence from China","authors":"G. Niu, Qi Wang, Yang Zhou","doi":"10.2139/ssrn.3765224","DOIUrl":"https://doi.org/10.2139/ssrn.3765224","url":null,"abstract":"In this paper, we explore the role of education in household FinTech adoption. Using representative nationwide household data from the 2017 China Household Finance Survey, we employ the change in China’s compulsory schooling law in the 1980s as an instrumental variable for educational attainment. We find that among Chinese households, education has statistically significant and economically important effects on the use of various FinTech services, including digital banking, mobile payment, digital wealth management, and digital consumer credit. Further analysis indicates that exogeneous increases in education lead to higher levels of financial literacy and social trust, both of which are potential drivers of FinTech adoption. Our findings provide new insights into the importance of education for household financial decision making and technology adoption.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"81 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126255522","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-09-01DOI: 10.5709/ce.1897-9254.408
Iacopo Odoardi, C. Pagliari
The wealth possessed by households, identifiable as so-called net worth, varies greatly in quantity and form between different socioeconomic contexts. We describe several forms of wealth typically owned by consumer households, considering their economic and social effects. We analyze the economic role of the wealth forms that compose the households’ net worth (real and financial assets minus the debt) in a panel data analysis of Italian regions, and we suggest a possible alternative use for a specific part of household net worth. In particular, the well-known financial share is already useful and exploited by the economic system, as confirmed empirically. Instead, a share of the real assets could prove useful as a source of support for the economy if some conditions are met. The results of the regional analysis illustrate the supposed lack of contribution and we suggest how the net worth not “fully exploited” could be integrated in the economic cycle, activating a propulsive mechanism to start “accelerated” growth processes.
{"title":"Household Wealth as a Factor of Economic Growth: A Case Study of Italy","authors":"Iacopo Odoardi, C. Pagliari","doi":"10.5709/ce.1897-9254.408","DOIUrl":"https://doi.org/10.5709/ce.1897-9254.408","url":null,"abstract":"The wealth possessed by households, identifiable as so-called net worth, varies greatly in quantity and form between different socioeconomic contexts. We describe several forms of wealth typically owned by consumer households, considering their economic and social effects. We analyze the economic role of the wealth forms that compose the households’ net worth (real and financial assets minus the debt) in a panel data analysis of Italian regions, and we suggest a possible alternative use for a specific part of household net worth. In particular, the well-known financial share is already useful and exploited by the economic system, as confirmed empirically. Instead, a share of the real assets could prove useful as a source of support for the economy if some conditions are met. The results of the regional analysis illustrate the supposed lack of contribution and we suggest how the net worth not “fully exploited” could be integrated in the economic cycle, activating a propulsive mechanism to start “accelerated” growth processes.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"76 3","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120978195","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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