NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Conference on Household Finance

September 21 and 22, 2012
Luigi Guiso, EIEF and Center for Economic Policy Research (CEPR); Michael Haliassos, Goethe University Frankfurt and CEPR; Tullio Jappelli, University of Naples Federico II and CEPR; Brigitte Madrian, Harvard University and NBER; Tarun Ramadorai, Saïd Business School and CEPR; Nicholas Souleles, University of Pennsylvania and NBER; Daniele Terlizzese, EIEF and Banca d'Italia; and Peter Tufano, Saïd Business School and NBER, Organizers

Kurt Mitman, University of Pennsylvania

Macroeconomic Effects of Bankruptcy and Foreclosure Policies

Mitman develops a general-equilibrium model of housing and default in order to jointly analyze the effects of bankruptcy and foreclosure policies. Heterogeneous households have access to mortgages and unsecured credit and can default separately on both types of debt. Mitman shows that the interaction between foreclosure and bankruptcy decisions is crucial for explaining the observed cross-state correlation between default policies and default rates. He uses the model to argue that a major recent reform to bankruptcy has unintended consequences: it substantially increases bankruptcy rates, despite being intended to reduce them, and also increases foreclosure rates. Nevertheless, the reform yields large welfare gains.


Alessandro Bucciol, University of Verona, and Raffaele Miniaci, Università degli Studi di Brescia

Household Portfolios and Risk Bearing over Age and Time

Bucciol and Miniaci exploit the U.S. Survey of Consumer Finances from 1998 to 2010 to study households’ portfolio risk bearing. They compare alternative measures of risk, based on a financial portfolio or on a broader portfolio that also includes human capital, real estate, business wealth, and related debt. These measures provide a different ranking of household risk bearing, but they all positively correlate with wealth, good health status, and financial sophistication. Moreover, risk bearing is estimated to fall in the early 2000s and to rise in the late 2000s; the risk-age profile is generally U-shaped; and younger cohorts face more risk.


Nikolaos Artavanis, Virginia Polytechnic Institute and State University; Adair Morse, University of Chicago and NBER; and Margarita Tsoutsoura, University of Chicago

Tax Evasion across Industries: Soft Credit Evidence from Greece

Artavanis, Morse, and Tsoutsoura begin with the new observation that banks lend to tax-evading individuals based on the bank's perception of true income. This insight leads to a novel approach for estimating tax evasion from private sector adaptation to semi-formality. The authors use household microdata from a large bank in Greece and replicate bank models of credit capacity, credit card limits, and mortgage payments to infer the bank's estimate of individuals' true income. They estimate a lower bound of 28 billion euros of unreported income for Greece. The foregone government revenues amount to 31 percent of the deficit for 2009. Primary tax evading occupations are doctors, engineers, private tutors, accountants, financial service agents, and lawyers. Testing the industry distribution against a number of redistribution and incentive theories, the evidence suggests that industries with low paper trails and industries supported by parliamentarians have more tax evasion. The authors conclude by commenting on the property right of informal income.


Adriano Rampini and S. Viswanathan, Duke University

Household Risk Management

Household risk management -- that is, households' insurance against adverse shocks to income, assets, and financing need -- is limited and often completely absent, in particular for poor households. In an infinite-horizon model in which households have access to complete markets, subject to collateral constraints, resulting in a trade-off between the financing needs for consumption and durable goods purchases and risk management concerns, Rampini and Viswanathan explain this basic pattern in household insurance . They show that household risk management is monotone in household net worth and income, under quite general conditions, in economies with income risk, durable goods, and durable goods price risk. The limited participation in markets for claims which allow household risk management is a result of the financing risk management trade-off and should not be considered a puzzle.


Jeffrey Brown, University of Illinois and NBER; Chichun Fang, University of Illinois; and Francisco Gomes, London Business School

Risk and Returns to Education: The Value of Human Capital (NBER Working Paper No. 18300)

Brown, Fang, and Gomes analyze the returns to education in a life-cycle framework that incorporates risk preferences, earnings volatility (including unemployment), and a progressive income tax and social insurance system. They show that such a framework significantly reduces the measured gains from education relative to simple present-value calculations, although the gains remain significant. For example, for a range of preference parameters, they find that individuals should be willing to pay 300 to 500 (200 to 250) thousand dollars to obtain a college (high school) degree in order to benefit from the 32 to 42 percent (20 to 38 percent) increase in annual certainty-equivalent consumption. They also explore how the measured value of education varies with preference parameters, by gender, and across time. In contrast to findings in the education wage-premia literature, which focus on present values and which are replicated in this data, the model here indicates that the gains from college education were flat in the 1980s and actually decreased significantly in 1991-2007 period. On the other hand, the gains to a high school education have increased quite dramatically over time. The authors also show that both high school and college education help to decrease the gender gap in life-time earnings, cagain ontrary to the conclusion from wage premia calculations.


Annamaria Lusardi, George Washington University and NBER; Pierre-Carl Michaud, Université du Québec à Montréal and RAND Corporation; and Olivia Mitchell, University of Pennsylvania and NBER

Optimal Financial Knowledge and Wealth Inequality

Financial knowledge is strongly positively related to household wealth, but there is also considerable cross-sectional variation in both financial knowledge and wealth levels. To explore these patterns, Lusardi, Michaud, and Mitchell develop a calibrated stochastic life-cycle model featuring endogenous financial knowledge accumulation. The model generates substantial wealth inequality, over and above that of standard life-cycle models; this is because higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with precautionary saving motives, boost their need for private wealth accumulation and thus financial knowledge. In the simulations here, endogenous financial knowledge accumulation accounts for about half of overall wealth inequality. The fraction of the population that is rationally "financially ignorant" depends on the generosity of the retirement system and on the level of means-tested benefits. Educational efforts that enhance financial savvy early in the life cycle, and provide an expected excess return of one percentage point, would be worth more than 80 percent of median initial wealth for high school dropouts and close to 60 percent for college graduates.

Mark Grinblatt, University of California at Los Angeles; Seppo Ikaheimo, Aalto University School of Economics; Matti Keloharju, Helsinki School of Economics; and Samuli Knupfer, London Business School

IQ and Mutual Fund Choice

Using a comprehensive dataset of Finnish males, Grinblatt, Ikaheimo, Keloharju, and Knupfer study the influence of IQ on mutual fund choice. They find that high-IQ investors are less likely to own categories of funds that tend to charge higher fees— including balanced funds, actively managed funds, and funds marketed through a retail network. Moreover, within categories of funds stratified by asset class, investment philosophy, and distribution method, the high-IQ investors prefer the lowest-fee funds, further reducing the fees incurred. IQ's effect on fee sensitivity controls for other investor attributes, including education and profession, and is robust to the addition of fund family dummies, alternative specifications, and analyses restricted to interesting subsamples of the data.


Henrik Cronqvist, Claremont McKenna College, and Stephan Siegel, University of Washington

Why Do Individuals Exhibit Investment Biases?

Cronqvist and Siegel find that a long list of investment biases, for example the reluctance to realize losses, performance chasing, and the home bias, are "human" in the sense that investors are born with them. Genetic factors explain up to 50 percent of the variation in these biases across individual investors. The authors also find that genetic factors influencing investment biases affect behaviors in other, non-investment, domains. For example, those with a preference for familiar stocks exhibit a preference for familiarity in other domains as well. These results provide empirical support for a biological basis for investment behaviors that have been shown to be wide-spread and persistent. Finally, the authors find that education does not seem to significantly reduce genetic predispositions to investment biases, and they demonstrate that accounting for confounding genetic factors is important when assessing whether, for example, education reduces investment biases.


Peter Bossaerts, Colin Camerer, and Antonio Rangel, California Institute of Technology; Nicholas Barberis, Yale University and NBER; and Cary Frydman, University of Southern California

Testing Theories of Investor Behavior Using Neural Data

Frydman, Barberis, Camerer, Bossaerts, and Rangel show that measures of neural activity provided by functional magnetic resonance imaging (fMRI) can be used to test between theories of investor behavior that are difficult to distinguish using behavioral data alone. Subjects traded stocks in an experimental market while the authors measured their brain activity. Behaviorally, the authors find that the average subject exhibits a strong disposition effect in his trading, even though it is suboptimal. They then use the neural data to test a specific theory of the disposition effect, the "realization utility" hypothesis, which argues that the effect arises because people derive utility directly from the act of realizing gains and losses. Consistent with this hypothesis, they find that activity in an area of the brain known to encode the value of decisions correlates with the capital gains of potential trades, that the size of these neural signals correlates across subjects with the strength of the behavioral disposition effects, and that activity in an area of the brain known to encode experienced utility exhibits a sharp upward spike in activity at precisely the moment at which a subject issues a command to sell a stock at a gain.


Magnus Dahlquist, Stockholm School of Economics; Jose Martinez, University of Oxford; and Paul Soderlind, University of St. Gallen

Individual Investor Activity and Performance

Dahlquist, Martinez, and Soderlind examine the activity and performance of a large panel of individual investors (approximately 70,000 investors and their daily returns over the 2000 to 2010 period) in Sweden's Premium Pension System. They document strong inertia in individuals' choices and changes of mutual funds. They also find that active investors outperform passive investors, and that there is a causal effect of fund changes on performance. This outperformance is primarily the result of dynamic fund selection. Activity is beneficial for the individual investor, whereas extreme flows out of mutual funds (which they attribute to financial advisors) affect funds' net asset value negatively for all investors.


Makoto Nakajima, Federal Reserve Bank of Philadelphia, and Irina Telyukova, University of California at San Diego

Home Equity in Retirement

Retired homeowners dissave more slowly than renters, suggesting that the effects of homeownership influence retirees' saving decisions. Nakajima and Telyukova empirically and theoretically investigate the life-cycle patterns of homeownership, housing, and non-housing assets in retirement. Using an estimated structural model of saving and housing decisions, they find first that homeowners dissave slowly because they prefer to stay in their house as long as possible, but they cannot easily borrow against it. Second, the 1996-2006 housing boom significantly increased homeowners' assets. These channels are also quantitatively significant; without considering homeownership, retirees' savings are 24-43 percent lower.


Ralph Koijen, University of Chicago and NBER; Stijn Van Nieuwerburgh, New York University and NBER; and Motohiro Yogo, Federal Reserve Bank of Minneapolis

Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice

Koijen, Van Nieuwerburgh, and Yogo develop a pair of risk measures for the universe of health and longevity products that includes life insurance, annuities, and supplementary health insurance. Health delta measures the differential payoff that a product delivers in poor health, while mortality delta measures the differential payoff that a product delivers at death. Optimal insurance choice simplifies to the problem of choosing a portfolio of health and longevity products that replicates the optimal health and mortality delta. For each household in the Health and Retirement Study, the authors calculate the health and mortality delta implied by its ownership of life insurance, annuities including private pensions, supplementary health insurance, and long-term care insurance. For the median household aged 51 to 58, the lifetime welfare cost of market incompleteness and suboptimal insurance choice is 17 percent of total wealth.


 
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