In the Money
Higher social class predicts increased unethical behavior
Paul Piff et al.
Proceedings of the National Academy of Sciences, forthcoming
Abstract:
Seven studies using experimental and naturalistic methods reveal that upper-class individuals behave more unethically than lower-class individuals. In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals. In follow-up laboratory studies, upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals. Mediator and moderator data demonstrated that upper-class individuals' unethical tendencies are accounted for, in part, by their more favorable attitudes toward greed.
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The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era
Christina Romer & David Romer
NBER Working Paper, February 2012
Abstract:
This paper uses the interwar period in the United States as a laboratory for investigating the incentive effects of changes in marginal income tax rates. Marginal rates changed frequently and drastically in the 1920s and 1930s, and the changes varied greatly across income groups at the top of the income distribution. We examine the effect of these changes on taxable income using time-series/cross-section analysis of data on income and taxes by small slices of the income distribution. We find that the elasticity of taxable income to changes in the log after-tax share (one minus the marginal rate) is positive but small (approximately 0.2) and precisely estimated (a t-statistic over 6). The estimate is highly robust. We also examine the time-series response of available indicators of investment and entrepreneurial activity to changes in marginal rates. We find suggestive evidence of an impact on business formation, but no evidence of an important impact on other indicators.
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Wealth Transfer Receipt and Later Life Wealth
Michael Nau & Dmitry Tumin
Research in Social Stratification and Mobility, forthcoming
Abstract:
Wealth ownership is highly concentrated in the U.S. and this inequality may be reproduced in subsequent generations through wealth transfers. Yet we do not know how households respond to the receipt of a wealth transfer and whether time amplifies the initial benefit of a wealth transfer. Using the Survey of Consumer Finances, we test whether wealth transfer recipients gain an advantage that cumulates with time. We find that the positive association between transfer amount and present net worth weakens as time elapsed since transfer receipt increases. The larger the wealth transfer, the more its association with net worth is diminished by time since transfer receipt. Though wealth transfers provide recipients with a significant initial advantage, households appear to adapt to wealth transfer receipt by some combination of reduced savings and increased consumption. We demonstrate an association between receiving a larger wealth transfer and one type of increased consumption, gift-giving.
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Tax policy and state economic growth: The long-run and short-run of it
Andrew Ojede & Steven Yamarik
Economics Letters, forthcoming
Abstract:
This paper uses a pooled mean group (PMG) estimator to evaluate the effects of tax policy on state-level growth. We find that property and sales tax rates have negative effects on long-run income growth, while income tax rates have no impact.
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Resolving Debt Overhang: Political Constraints in the Aftermath of Financial Crises
Atif Mian, Amir Sufi & Francesco Trebbi
NBER Working Paper, February 2012
Abstract:
Debtors bear the brunt of a decline in asset prices associated with financial crises and policies aimed at partial debt relief may be warranted to boost growth in the midst of crises. Drawing on the US experience during the Great Recession of 2008-09 and historical evidence in a large panel of countries, we explore why the political system may fail to deliver such policies. We find that during the Great Recession creditors were able to use the political system more effectively to protect their interests through bailouts. More generally we show that politically countries become more polarized and fractionalized following financial crises. This results in legislative stalemate, making it less likely that crises lead to meaningful macroeconomic reforms.
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Maggie Sweitzer et al.
Social Cognitive and Affective Neuroscience, forthcoming
Abstract:
Inconsistent or null findings among studies associating behaviors on the externalizing spectrum-addictions, impulsivity, risk-taking, novelty-seeking traits-with presence of the 7-repeat allele of a common length polymorphism in the gene encoding the dopamine D4 receptor (DRD4) may stem from individuals' variable exposures to prominent environmental moderators (gene x environment interaction). Here, we report that relative preference for immediate, smaller rewards over larger rewards delayed in time (delay discounting), a behavioral endophenotype of impulsive decision-making, varied by interaction of DRD4 genotype with childhood socioeconomic status (SES) among 546 mid-life community volunteers. Independent of age, sex, adulthood SES, and IQ, participants who were both raised in families of distinctly low SES (low parental education and occupational grade) and carried the DRD4 7-repeat allele discounted future rewards more steeply than like-reared counterparts of alternate DRD4 genotype. In the absence of childhood socioeconomic disadvantage, however, participants carrying the 7-repeat allele discounted future rewards less steeply. This bidirectional association of DRD4 genotype with temporal discounting, conditioned by participants' early life circumstances, accords with a recently proposed developmental model of gene x environment interaction ("differential susceptibility") that posits genetically modulated sensitivity to both adverse and salubrious environmental influences.
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Can 401(k) Plans Provide Adequate Retirement Resources?
Peter Brady
Public Finance Review, March 2012, Pages 177-206
Abstract:
Even though they have only existed since 1981, some analysts have concluded that 401(k) plans are a failure. For example, some argue that 401(k) plans are "coming up short" due to, among other factors, the low contribution rates of participants. A recent government report concluded that "low defined contribution plan savings may pose challenges to retirement security." There are also proposals to replace 401(k) plans with mandated savings. This article illustrates that moderate 401(k) contribution rates can lead to adequate retirement income for many workers; that adequate asset accumulation can be achieved using only a 401(k) plan; and that these results do not rely on earning an investment premium on risky assets. Using Monte Carlo simulation techniques, this study also illustrates the investment risk faced by participants who choose to invest in risky assets, or who choose to make systematic withdrawals in retirement rather than annuitize their account balance.
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Were They Prepared for Retirement? Financial Status at Advanced Ages in the HRS and AHEAD Cohorts
James Poterba, Steven Venti & David Wise
NBER Working Paper, February 2012
Abstract:
Many analysts have considered whether households approaching retirement age have accumulated enough assets to be well prepared for retirement. In this paper, we shift from studying household finances at the start of the retirement period, an ex ante measure of retirement preparation, to studying the asset holdings of households in their last years of life. The analysis is based on Health and Retirement Study with special attention to Asset and Health Dynamics Among the Oldest Old (AHEAD) cohort that was first surveyed in 1993. We consider the level of assets that households hold in the last survey wave preceding their death. We study how assets at the end of life depend on three family status pathways prior to death - (1) original one-person households in 1993, (2) persons in two-person household in 1993 with a deceased spouse in the last year observed, and (3) persons in two-person households in 1993 with the spouse alive when last observed. We find that a substantial fraction of persons die with virtually no financial assets - 46.1 percent with less than $10,000 - and many of these households also have no housing wealth and rely almost entirely on Social Security benefits for support. In addition this group is disproportionately in poor health. Based on a replacement rate comparison, many of these households may be deemed to have been well-prepared for retirement, in the sense that their income in their final years was not substantially lower than their income in their late 50s or early 60s. Yet with such low asset levels, they would have little capacity to pay for unanticipated needs such as health expenses or other financial shocks or to pay for entertainment, travel, or other activities. This raises a question of whether the replacement ratio is a sufficient statistic for the "adequacy" of retirement preparation.
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Can Improved Options for Private Saving Offer a Plausible Substitute for Public Pensions?
Gary Burtless
Politics & Society, March 2012, Pages 81-105
Abstract:
Old-age income protection is provided in wealthy democracies by publicly funded defined-benefit pensions. Budgetary challenges have forced policy makers to consider private alternatives to these traditional systems. I consider the shortcomings of private saving arrangements in duplicating the advantages of public pensions. Some shortcomings can be overcome by introducing compulsory elements into private saving plans. Worker contributions into such plans could be mandatory; some or all worker accumulations in the plans could be converted to annuities at retirement; and workers' investment choices could be narrowly circumscribed. These restrictions do not eliminate the biggest weakness of private saving plans. Fluctuations in asset prices make it hard even for well-informed savers to select an affordable saving rate and an investment strategy that will assure decent income in old age. Public pension systems partly insulate workers against economic and financial market risks by sharing those risks broadly across workers, retirees, and taxpayers in multiple generations.
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Financial Sophistication in the Older Population
Annamaria Lusardi, Olivia Mitchell & Vilsa Curto
NBER Working Paper, February 2012
Abstract:
This paper examines data on financial sophistication among the U.S. older population, using a special-purpose module implemented in the Health and Retirement Study. We show that financial sophistication is deficient for older respondents (aged 55+). Specifically, many in this group lack a basic grasp of asset pricing, risk diversification, portfolio choice, and investment fees. Subpopulations with particular deficits include women, the least educated, persons over the age of 75, and non-Whites. In view of the fact that people are increasingly being asked to take on responsibility for their own retirement security, such lack of knowledge can have serious implications.
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The effect of question wording on consumers' reported inflation expectations
Wändi Bruine de Bruin et al.
Journal of Economic Psychology, forthcoming
Abstract:
Economists and policy makers increasingly consult national household surveys asking individuals about their economic circumstances, financial decisions, and expectations for the future. For decades, the Reuters/Michigan Survey of Consumers and other national surveys have asked about expectations for "prices in general," with responses being used by academic economists, policy makers, and central bankers. Although median responses track official inflation estimates, respondents exhibit considerable disagreement, with some reporting seemingly large overestimations. Here, we demonstrate that changes in the wording of survey questions about inflation expectations affect the central tendency of responses as well as their dispersion. We randomly assigned respondents to questions asking about "prices in general," "inflation," or "prices you pay." Respondents' expectations and perceptions were lower and less dispersed when questions asked about "inflation" instead of "prices in general" or "prices you pay," with the latter two formulations eliciting similar response patterns. These question-wording effects were mediated by how much respondents thought of (extreme) personal price experiences when receiving questions about "prices in general" or "prices you pay." Compared to questions about "inflation," questions about "prices in general" and "prices you pay" elicited expectations that were more strongly correlated to expected increases in gas prices, which were relatively large and likely salient at that time.
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On Assets and Debt in the Psychology of Perceived Wealth
Abigail Sussman & Eldar Shafir
Psychological Science, January 2012, Pages 101-108
Abstract:
We studied the perception of wealth as a function of varying levels of assets and debt. We found that with total wealth held constant, people with positive net worth feel and are seen as wealthier when they have lower debt (despite having fewer assets). In contrast, people with equal but negative net worth feel and are considered wealthier when they have greater assets (despite having larger debt). This pattern persists in the perception of both the self and others. We explore consequences for the willingness to borrow and lend and briefly discuss the policy implications of these findings.
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Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates
Tal Gross, Matthew Notowidigdo & Jialan Wang
NBER Working Paper, February 2012
Abstract:
This paper estimates the extent to which legal fees prevent liquidity-constrained households from declaring bankruptcy. To do so, it studies how the 2001 and 2008 tax rebates affected consumer bankruptcy filings. We exploit the randomized timing of the rebate checks and estimate that the rebates caused a significant, short-run increase in consumer bankruptcies in both years, with larger effects in 2008 when the rebates were more generous and more widely distributed. Using hand-collected data from individual bankruptcy petitions, we document that the rebates caused an increase in the average liabilities and the liabilities-to-income ratios of filers.
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Barak Ariel
Criminology, February 2012, Pages 27-69
Abstract:
Previous studies on tax compliance have focused primarily on the tax-reporting behavior of individuals. This study reports results from a randomized field test of the effects of deterrence and moral persuasion on the tax-reporting behavior of 4,395 corporations in Israel. Two experimental groups received tax letters, one conveying a deterrent message and the other a moral persuasion message. Three types of measures are used to evaluate compliance based on the magnitude of the difference-in-differences of means in 1) gross sales values reported to the authority, 2) tax dollars paid to the authority, and 3) tax deductions. Overall, both deterrence and moral persuasion approaches do not produce statistically significant greater compliance compared with control conditions. These results do not support the ability of a policy of sending tax letters to increase substantively the reporting of true tax liability or tax payments by corporations. However, these results also show that moral persuasion can be counterproductive: Corporations in this experimental group show an increase rather than a decrease in tax deductions, which translates into loss of state revenues. The implications for theory, research, and tax policy are discussed.
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The Decision to Delay Social Security Benefits: Theory and Evidence
John Shoven & Sita Nataraj Slavov
NBER Working Paper, February 2012
Abstract:
Social Security benefits may be commenced at any time between age 62 and age 70. As individuals who claim later can, on average, expect to receive benefits for a shorter period, an actuarial adjustment is made to the monthly benefit amount to reflect the age at which benefits are claimed. We investigate the actuarial fairness of this adjustment. Our simulations suggest that delaying is actuarially advantageous for a large subset of people, particularly for real interest rates of 3.5 percent or below. The gains from delaying are greater at lower interest rates, for married couples relative to singles, for single women relative to single men, and for two-earner couples relative to one-earner couples. In a two-earner couple, the gains from deferring the primary earner's benefit are greater than the gains from deferring the secondary earner's benefit. We then use panel data from the Health and Retirement Study to investigate whether individuals' actual claiming behavior appears to be influenced by the degree of actuarial advantage to delaying. We find no evidence of a consistent relationship between claiming behavior and factors that influence the actuarial advantage of delay, including gender and marital status, interest rates, subjective discount rates, or subjective assessments of life expectancy.
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The Cost of Not Knowing the Score: Self-Estimated Credit Scores and Financial Outcomes
Benjamin Levinger, Marques Benton & Stephan Meier
Journal of Family and Economic Issues, December 2011, Pages 566-585
Abstract:
This study analyzes consumers' knowledge of their own credit situation and tests whether a lack of knowledge affects financial outcomes. The unique dataset from survey and credit report data includes self-estimates of credit scores and actual scores from a low-to-moderate income sample. We argue and show empirically that many respondents don't know their credit score and generally underestimate their creditworthiness. Furthermore, our evidence suggests that this biased self-assessment may explain differences in perceived credit constraints and credit contracts, specifically credit card interest rates. Our research suggests that an important aspect of financial literacy is self-assessment, and that it is important to encourage consumers to regularly check their credit reports and scores so as to better understand their actual creditworthiness.
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Small Cues Change Savings Choices
James Choi et al.
NBER Working Paper, February 2012
Abstract:
In randomized field experiments, we embedded one- to two-sentence anchoring, goal-setting, or savings threshold cues in emails to employees about their 401(k) savings plan. We find that anchors increase or decrease 401(k) contribution rates by up to 1.4% of income. A high savings goal example raises contribution rates by up to 2.2% of income. Highlighting a higher savings threshold in the match incentive structure raises contributions by up to 1.5% of income relative to highlighting the lower threshold. Highlighting the maximum possible contribution rate raises contribution rates by up to 2.9% of income among low savers.
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Workers' Compensation and Consumption Smoothing
Erin Todd Bronchetti
Journal of Public Economics, forthcoming
Abstract:
This paper investigates the consumption-smoothing benefits of state workers' compensation (WC) programs. These programs are among the largest and most controversial forms of social insurance, with the putative purpose of supporting families affected by unexpected income shocks due to workplace injuries and illnesses. Using Health and Retirement Study (HRS) data for a sample of workers who have experienced a work-related, work-limiting disability, I find that a 10 percent increase in WC benefit generosity offsets the drop in household consumption upon injury by 3 to 5 percent. Moreover, my estimates imply that if benefits were very low, the drop in consumption upon injury would be in the range of 30 percent. A model adapted from the literature on optimal social insurance yields a formula for the optimal level of WC benefits, which depends on empirical estimates of the consumption-smoothing parameter. My calculations suggest that current WC benefit levels are somewhat higher than optimal.
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How Do Laffer Curves Differ Across Countries?
Mathias Trabandt & Harald Uhlig
NBER Working Paper, February 2012
Abstract:
We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt-Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income. We update the sample to 2010, thereby including recent increases in government spending and their fiscal consequences. We provide new tax rate data. We conduct an analysis for the pessimistic case that the recent fiscal shifts are permanent. We include a cross-country analysis on consumption taxes as well as a more detailed investigation of the inclusion of human capital considerations for labor taxation.