Due Credit
Indebted Demand
Atif Mian, Ludwig Straub & Amir Sufi
Quarterly Journal of Economics, forthcoming
Abstract:
We propose a theory of indebted demand, capturing the idea that large debt burdens lower aggregate demand, and thus the natural rate of interest. At the core of the theory is the simple yet underappreciated observation that borrowers and savers differ in their marginal propensities to save out of permanent income. Embedding this insight in a two-agent perpetual-youth model, we find that recent trends in income inequality and financial deregulation lead to indebted household demand, pushing down the natural rate of interest. Moreover, popular expansionary policies -- such as accommodative monetary policy -- generate a debt-financed short-run boom at the expense of indebted demand in the future. When demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap. Escaping a debt trap requires consideration of less conventional macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.
Inflating Away the Public Debt? An Empirical Assessment
Jens Hilscher, Alon Raviv & Ricardo Reis
Review of Financial Studies, forthcoming
Abstract:
This paper proposes a new method for measuring the impact of inflation on the real value of public debt. The distribution of debt debasement is based on two inputs: the distribution of privately held nominal debt by maturity, for which we provide new estimates, and the distribution of risk-adjusted inflation dynamics, for which we provide a novel copula estimator using options data. We find that inflation by itself is unlikely to lower the U.S. fiscal burden significantly because debt is concentrated at short maturities and perceived inflation shocks have little short-run persistence and are small.
Color and credit: Race, regulation, and the quality of financial services
Taylor Begley & Amiyatosh Purnanandam
Journal of Financial Economics, forthcoming
Abstract:
The incidence of misselling, fraud, and poor customer service by retail banks is significantly higher in areas with higher proportions of poor and minority borrowers and in areas where government regulation promotes an increased quantity of lending. Specifically, low-to-moderate-income (LMI) areas targeted by the Community Reinvestment Act have significantly worse outcomes, and this effect is larger for LMI areas with a high-minority population share. The results highlight an unintended adverse consequence of such quantity-focused regulations on the quality of credit to lower-income and minority customers.
Do Lenders Still Discriminate? A Robust Approach for Assessing Differences in Menus
David Hao Zhang & Paul Willen
Federal Reserve Working Paper, January 2021
Abstract:
We use a new methodology to assess mortgage pricing discrimination by race. We make four main contributions. First, we show that existing estimates of mortgage pricing differences by race can be confounded by a "menu problem," which is the problem associated with evaluating equality in opportunity under multi-dimensional pricing. Though under-appreciated, the menu problem is broadly relevant in economic assessments of differences in opportunity given data on outcomes. Second, we provide a general methodology for resolving this menu problem based on relatively weak economic assumptions. More specifically, we use pairwise dominance relationships in mortgage pricing supplemented by restrictions on the range of plausible menus to define (1) a test statistic for equality in menus and (2) a difference in menus (DIM) metric for assessing whether one group of borrowers would prefer to switch to another group's menus. Our metrics are robust to arbitrary heterogeneity in borrower preferences across racial groups over the menu items, are sharp in terms of identification, and can be efficiently computed using methods from Optimal Transport. Third, to conduct statistical inference we devise a new procedure for hypothesis testing in the value of Optimal Transport problems based on directional differentiation. Fourth, we use our methodology to estimate mortgage pricing differentials by race on a new data set linking 2018--2019 Home Mortgage Disclosure Act (HMDA) data to Optimal Blue rate locks. We find robust evidence for mortgage pricing differentials by race, particularly among Conforming mortgage borrowers who are relatively creditworthy.
How Credit Markets Substitute for Welfare States and Influence Social Policy Preferences: Evidence from US States
Andreas Wiedemann
British Journal of Political Science, forthcoming
Abstract:
What is the relationship between debt and the welfare state? Recent arguments suggest that credit markets fill gaps left by limited social benefits but often rest on thin empirical grounds. This article makes two contributions to this debate by using micro-level panel data and leveraging variation in welfare state generosity across US states and over time. First, it shows that households that experience unemployment borrow significantly more in states where unemployment benefits are low compared to states where benefits are high. A 10-percentage-point decrease in unemployment replacement rates increases debt levels by about 30 per cent, or $5,300. Secondly, the article documents that rising indebtedness in the context of weak social policies has political consequences and increases support for a stronger safety net. One explanation is that voters seek social protection against downstream debt-induced economic risks. These findings suggest that welfare states can play a critical role in mitigating growing indebtedness.
Reassessing the Property Tax
Christopher Berry
University of Chicago Working Paper, March 2021
Abstract:
The property tax is the single largest source of revenue for American local governments. It is designed to be an ad valorem tax. The fairness and accuracy of the tax hinges on the quality of property valuation by local assessors. Using data from millions of residential real estate transactions, this paper shows that assessments are typically regressive, with low-priced properties being assessed at a higher value, relative to their actual sale price, than are high-priced properties. Within a jurisdiction, homes in the bottom decile of sale price face an assessment level, as a proportion of price, that is twice as high as that faced by homes in the top decile, on average. As a result, the property tax disproportionately burdens owners of less valuable homes. Such regressivity is evident throughout the US. This result cannot be explained by measurement error in sale prices, or by explicit policy choices, such as assessment limits. Rather, regressivity appears to result from limitations in the data and methods used in assessment.
Partisanship and Fiscal Policy in Economic Unions: Evidence from U.S. States
Gerald Carlino et al.
NBER Working Paper, February 2021
Abstract:
Partisanship of state level politicians affect the impact of federal fiscal policy in the U.S. Using data from close gubernatorial elections, we find partisan differences in the marginal propensity to spend federal transfers since the early 1980's: Republican governors spend less. A New Keynesian model of partisan states in a monetary union implies sizable aggregate income effects from these partisan differences. First, the transfer multiplier would rise by 0.60 if Republican governors were to spend as much from federal aid as do Democratic governors. Second, the observed changes in the share of Republican governors imply variation in the fiscal multiplier of 0.40. Local projection regressions support this prediction.
The Marginal Effect of Government Mortgage Guarantees on Homeownership
Serafin Grundl & You Suk Kim
Journal of Monetary Economics, forthcoming
Abstract:
The U.S. government guarantees a majority of residential mortgages to promote homeownership. This paper uses property-level data to estimate the effect of government guarantees on homeownership and other housing market outcomes, by exploiting variation of the conforming loan limits (CLLs) along county borders. We find that CLL changes had effects on government guarantees, house prices, house sales and construction activity, but find no robust effect on homeownership. The confidence intervals of our estimates suggest that one additional homeowner corresponds to an increase of government guarantees by at least $6 million. Therefore government guarantees could be considerably reduced with modest effects on homeownership. Our findings are relevant for housing finance reform plans that propose to lower the CLLs.
The Influence of Corporate Income Taxes on Investment Location: Evidence from Corporate Headquarters Relocations
Travis Chow et al.
Management Science, forthcoming
Abstract:
This study examines the effects of jurisdictions’ corporate taxes and other policies on firms’ headquarters (HQ) location decisions. Using changes in state corporate income tax rates across time and states as the setting, we find that a one-percentage-point increase in the HQ state corporate income tax rate increases the likelihood of firms relocating their HQ out of the state by 16.8%, and an equivalent decrease in the HQ state rate decreases the likelihood of HQ relocations by 9.1%. Exploiting the unique tax policy features within the state apportionment system lends strong support to the interpretation that taxation drives this effect. Our analyses also demonstrate that state income tax features affect the destination of the HQ move. We contribute to the literature on corporate decision making by showing how state income taxation affects a real corporate decision that has significant economic consequences for the company and the state.
Helping or Hurting? The Efficacy of Municipal Bankruptcy
Carolyn Abott & Akheil Singla
Public Administration Review, forthcoming
Abstract:
Local governments facing extreme fiscal stress have few options. One that has historically been rare is filing for Chapter 9 bankruptcy. The limited number of cases has prevented systematic study of municipal bankruptcy. But given the results of bankruptcy for individuals, there are reasons to believe that bankruptcy can provide a financial fresh start for local governments. This research leverages six municipal bankruptcies in the years immediately following The Great Recession to explore the effects of bankruptcy on local government financial health. It employs a variety of empirical approaches to generate a counterfactual for the bankrupt governments and assess the effects of bankruptcy: synthetic control, propensity score matching, staggered difference‐in‐differences, and an event study. The results show that bankruptcy is associated with no declines and some meaningful improvements in financial health. These findings suggest that Chapter 9 bankruptcy may provide extremely stressed local governments with a potential path forward.
Avoiding Punishment? Electoral Accountability for Local Fee Increases
Katy Hansen, Shadi Eskaf & Megan Mullin
Urban Affairs Review, forthcoming
Abstract:
Do voters punish incumbent legislators for raising service costs? Concern about electoral punishment is considered a leading obstacle to increasing taxes and fees to fund service provision, but empirical evidence of such backlash is surprisingly sparse. This paper examines whether voters hold local elected officials accountable for raising water service costs. Using 10 years of panel data on municipal elections and water rates in North Carolina, we find rate increases do not reduce incumbent city council members’ vote shares. Local politicians may overestimate their electoral risk from raising taxes and fees to fund public services.
Stress Tests, Entrepreneurship, and Innovation
Sebastian Doerr
Review of Finance, forthcoming
Abstract:
This paper shows that post-crisis stress tests have negative effects on entrepreneurship and innovation at young firms. Exploiting unique data on business-related home equity loans in HMDA, I show that stress tested banks strongly cut small business loans secured by home equity, an important source of financing for entrepreneurs. Lower credit supply leads to a relative decline in entrepreneurship in counties with higher exposure to stress tested banks. The decline is stronger in sectors with a higher share of young firms using home equity financing, i.e., in which the reduction in credit hits hardest. More-exposed counties also see a decline in young firms' patent applications as well as labor productivity, reflecting young firms' disproportionate contribution to growth.
Mortgage Brokers and the Effectiveness of Regulatory Oversights
Sumit Agarwal et al.
Management Science, forthcoming
Abstract:
This paper studies the responses among different types of mortgage brokers to occupational licensing regulations. By explicitly accounting for heterogeneities between sole and corporate brokers, we find evidence that sole brokers respond to financial regulatory oversight by applying a more stringent screening process in conducting brokerage activities, hence achieving better loan performances. Specifically, loans originated through sole brokers exhibit higher quality on an array of credit-relevant characteristics, including those reported and unreported to future investors. By contrast, we find no such regulatory effect on corporate brokers who tend to rely extensively on reported characteristics that are critical to the subsequent loan securitization at the expense of unreported information despite the latter indicating potential risks. Hence, the agency problem among sole brokers can be mitigated by the consolidated financial requirement for occupational licensing. However, such provision is ineffective in governing corporate brokers. Additionally, welfare gains associated with the occupational licensing regulation are achieved at the expense of prospective borrowers paying a higher loan price and having reduced credit access. Stricter licensing regulations may induce welfare loss related to credit rationing as reasonable loan applications are not funded, including those with potentially lower default risk.
Foreclosure Externalities and Vacant Property Registration Ordinances
Arnab Biswas et al.
Journal of Urban Economics, forthcoming
Abstract:
Vacant Property Registration Ordinances (VPROs) were widely adopted by local U.S. governments to compel mortgage lenders to monitor and maintain foreclosed properties. Using a border discontinuity, triple difference identification strategy, we find that enactment of VPROs in Florida more than halved the negative spillover from proximate foreclosures on arms-length sale prices. This finding is robust to various time-by-location fixed effects, different distance buffers around VPRO/non-VPRO borders, alternative foreclosure measures, and two falsification exercises. Finally, we show that foreclosed properties subject to a VPRO sell at higher prices when ultimately returned to the market, consistent with an underlying physical externality.
The Impact of Consumer Credit Access on Self-Employment and Entrepreneurship
Kyle Herkenhoff, Gordon Phillips & Ethan Cohen-Cole
Journal of Financial Economics, forthcoming
Abstract:
We examine how consumer credit affects entrepreneurship by linking three million earnings and pass-through tax records to credit reports. In the cross-section, we show that self-employment without employees and employer firm ownership increase monotonically with credit limits and credit scores. We then isolate individuals who have had discrete increases in credit limits after the exogenous removal of bankruptcy flags to measure the effects of personal credit on entrepreneurship. Following bankruptcy flag removal, individuals are more likely to start a new employer business and borrow extensively. Those who own businesses with employees borrow $40,000 more after bankruptcy flag removal, a 33% gain relative to the sample average.