States of Money
Inflation Preferences
Hassan Afrouzi et al.
NBER Working Paper, April 2024
Abstract:
We document novel survey-based facts on preferred long-run inflation rates among U.S. consumers. Consumers on average prefer a 0.20% annual inflation rate, considerably below the Federal Reserve’s 2% target. Inflation preferences not only correlate with demographic and socioeconomic characteristics, but also with economic reasoning. A randomized control trial reveals that two narratives based on economic models -- describing how inflation lowers the real value of wages as well as money holdings -- affect inflation preferences. While our results can inform the design of central bank communication on inflation targets, they also raise questions about the alignment between such targets and consumer preferences.
The Burden of National Debt: Evidence from Mergers and Acquisitions
Ruchith Dissanayake, Yanhui Wu & Huizhong Zhang
Review of Corporate Finance Studies, May 2024, Pages 583-624
Abstract:
Increases in government debt are associated with a reduction in the yield spread between high-grade corporate bonds and long-term Treasuries and an increase in fiscal uncertainty. Consequently, increases in government debt significantly reduce the firm’s likelihood of acquisition. The effect is stronger among firms whose debt is a closer substitute for Treasuries and firms with greater exposure to fiscal uncertainty. A positive change in government debt motivates acquirers to avoid cash financing or more irreversible deals. The average deal quality is lower during periods of rising public debt, consistent with heightened fiscal uncertainty impeding monitoring and fostering “bad” deals.
Should Bank Stress Tests Be Fair?
Paul Glasserman & Mike Li
Management Science, forthcoming
Abstract:
Regulatory stress tests have become one of the main tools for setting capital requirements at the largest U.S. banks. The Federal Reserve uses confidential models to evaluate bank-specific outcomes for bank-specific portfolios in shared stress scenarios. As a matter of policy, the same models are used for all banks, despite considerable heterogeneity across institutions; individual banks have contended that some models are not suited to their businesses. Motivated by this debate, we ask, what is a fair aggregation of individually tailored models into a common model? We argue that simply pooling data across banks treats banks equally but is subject to two deficiencies: it may distort the impact of legitimate portfolio features, and it is vulnerable to implicit misdirection of legitimate information to infer bank identity. We compare various notions of regression fairness to address these deficiencies, considering both forecast accuracy and equal treatment. In the setting of linear models, we argue for estimating and then discarding centered bank fixed effects as preferable to simply ignoring differences across banks. We also discuss extensions to nonlinear models.
Is the Decline in the Number of Community Banks Detrimental to Community Economic Development?
Bernadette Minton, Alvaro Taboada & Rohan Williamson
Ohio State University Working Paper, April 2024
Abstract:
Our research examines the impact of dwindling community bank numbers on community investment and economic development. Initially, we confirm the vital role of community banks’ small business lending in local development. Contrary to popular belief, we find that a decrease in community banks positively affects community investment, through small business loan (SBL) originations. Key factors include the local presence of other community banks and the continuity of the consolidating bank's presence. Interestingly, the effect remains neutral in underserved or distressed counties and diminishes when a large bank acquires a community bank without maintaining a local presence. Post-consolidation, community banks emerge larger and more robust, capable of issuing larger SBLs, while larger banks and Fintech firms contribute by providing smaller SBLs. Overall, our findings reinforce the critical contribution of community banks to local development, suggesting that a reduction in their numbers leads to a stronger, more stable banking infrastructure in the small business lending landscape.
Banking bad? A global field experiment on risk, reward, and regulation
Michael Findley, Daniel Nielson & J.C. Sharman
American Journal of Political Science, forthcoming
Abstract:
Are banks sensitive to risk and reward in following global corporate transparency rules? Using a worldwide field experiment, this study evaluates competing predictions from expected utility, behavioralist, and institutionalist accounts. We incorporated a dozen companies around the world to make over 15,000 email solicitations asking for corporate accounts from 5000 of the world's internationally connected banks. Treatments randomize the risk profiles of different companies -- by their countries’ association with corruption, terrorism, and tax evasion -- and vary rewards by stating differing amounts of business revenues. The outcomes are the rates at which banks offer accounts and comply with rules on customer identification. The results suggest that banks are moderately responsive to risk -- though not reward -- but the magnitude of the effects is small, providing mixed evidence for conventional models and suggestive support for institutionalist accounts.
Do homeowners care about tax relief? Property tax relief and tax perceptions in the United States
Yusun Kim
Public Budgeting & Finance, forthcoming
Abstract:
This study examines whether receiving property tax relief contributes to homeowner's support for local taxes and spending. Using a survey sample of 10,655 homeowners in 40 US States in 2022, I find a negative association between property tax relief and opposition against property tax. Also, homeowners who receive property tax relief are more likely to support higher local taxes. Homeowners who receive tax reduction display a weaker preference for local budget cuts and a stronger preference for tax increases than homeowners who do not. These results suggest that tax relief may contribute to a higher tolerance for tax increases.
Non-monetary sanctions as tax enforcement tools: Evaluating California's top 500 program
Chad Angaretis et al.
Journal of Policy Analysis and Management, forthcoming
Abstract:
Many U.S. states and countries around the world use non-monetary sanctions, including public disclosure, license suspension, and withholding of other government-provided benefits or privileges, to encourage tax compliance. Little is known about the effectiveness of these programs. Using administrative tax microdata from California's “Top 500” program, we study whether notices warning of the imminent publication of a taxpayer's personal information and potential license suspension affect payment and other compliance outcomes. Exploiting variation over time in the cutoff balance for program eligibility, we find evidence of strong positive compliance responses to the program. We also develop estimates of the long-run revenue and social-welfare effects of the program. Together, these results suggest that non-monetary sanctions can be efficient tax enforcement tools, at least among the relatively high-income population we study.
Deferred Tax Asset Revaluations, Costly Information Processing, and Bank Deposits: Evidence from the Tax Cuts and Jobs Act
Ulf Mohrmann & Jan Riepe
Management Science, forthcoming
Abstract:
We examine how information processing costs affect the extent to which depositors’ use the details in banks’ income statements. Depositors have a unique cost-benefit structure because they are nonprofessional users of financial information and have high information processing costs. At the same time, they benefit from acting quickly because failing banks make payments on a first-come, first-serve basis. This makes it likely that they will react to a prominent summary measure like the reported net income without adjusting for any risk-irrelevant information included in the line items. In our empirical analysis, we investigate depositors’ behavior as driven by the mechanical revaluations of deferred tax assets due to the 2017 Tax Cuts and Jobs Act. Using a difference-in-difference design, we find deposit withdrawals because of this risk-irrelevant information. In cross-sectional tests, we show that the withdrawals are stronger if the information acquisition costs are low, and the information integration costs are high. Overall, our results show that information processing costs are important for understanding depositors’ reactions to accounting information and can lead to deposit flows that cannot be explained by new risk-relevant information.
Grantmaking, Grading on a Curve, and the Paradox of Relative Evaluation in Nonmarkets
Jérôme Adda & Marco Ottaviani
Quarterly Journal of Economics, May 2024, Pages 1255–1319
Abstract:
The article develops a model of nonmarket allocation of resources such as the awarding of grants to meritorious projects, honors to outstanding students, or journal slots to quality publications. On the supply side, the available budget of grants is awarded to applicants who are evaluated most favorably according to the noisy information available to reviewers. On the demand side, stronger candidates are more likely to obtain grants and thus self-select into applying, given that applications are costly. We establish that if evaluation is perfect, grading on a curve inefficiently discourages even the very best candidates from applying. More generally, when the budget is insufficient to award grants to all applicants, the equilibrium unravels if information is symmetric enough -- the paradox of relative evaluation. Leveraging a technique based on the quantile function pioneered by Lehmann, we characterize a broad set of nonmarket allocation rules under which an increase in evaluation noise in a field (or course) raises equilibrium applications in that field, and reduces applications in all other fields. We empirically confirm these comparative statics by exploiting a change in the rule for apportioning the total budget to applications in different fields at the European Research Council, showing that a 1 standard deviation increase in own evaluation noise leads to a 0.4 standard deviation increase in the number of applications and budget share. Moreover, we derive insights for the design of evaluation institutions, particularly regarding the endogenous choice of noise by fields or courses and the optimal aggregation of fields into panels.
From vacancy to verdancy? The impact of land options on the timing of vacant lot investment
Desen Lin
Real Estate Economics, forthcoming
Abstract:
Land vacancy is a persistent phenomenon leading to various socioeconomic issues in postindustrial cities. We examine the relationship between the timing of vacant lot investment and land options and compare two investment options using a quasi-experimental design: housing investment that develops vacant lots into housing, and greening investment that converts vacant lots into gardens and reserves redevelopment options. By compiling a unique lot-level time-to-event dataset based on a large-scale vacant lot greening program in Philadelphia, we address the questions of whether and how introducing the option of greening investment to vacant lots can expedite initial investment and reduce vacancy. With the greening option, initial investment on vacant lots becomes less irreversible, thus reducing time in vacancy by 50% and elevating the hazard rate of investment by 80%. We test for the presence of the real options channel, identifying a decelerating (accelerating) effect of price uncertainty (price growth rate) on the timing of housing investment and insignificant effects of the factors on the timing of greening investment. Our findings suggest that vacant lot greening as an anti-blight strategy is more effective to expedite investment in neighborhoods with elevated uncertainty, subdued growth rate, moderately lower income, and heightened vacancy.