Household Finance: Regulation and Intermediation
Sunday, Jan. 5, 2020 10:15 AM - 12:15 PM (PDT)
- Chair: Motohiro Yogo, Princeton University
Internal Deadlines, Drug Approvals, and Safety Problems
AbstractDrug approvals around the world surge in December and at the end of each calendar month. Drugs approved in December and at month-ends are associated with significantly more adverse effects, and significantly more serious adverse effects such as hospitalizations, life-threatening incidents, and even deaths. These approval and adverse effects patterns are found in a large, global data set consisting of drug approvals from the United States, European Union, Japan, China, and South Korea, suggesting that this pattern reflects a behavioral regularity common across time, cultures, and regulatory regimes. In the United States, the number of December drug approvals is roughly 80% larger than in any other month (t =7.29). Moreover, in the United States we also observe an output spike before Thanksgiving - and in China before the Chinese New Year - but not the converse, and no associated spikes in countries in which these holidays are not celebrated. There are no explicit deadlines forcing drug approvals in December, nor do the December drugs appear different on any observable risk metrics – e.g., disease type, market size, or population targeted. The December approval effect is larger in years in which fewer drugs have been approved in the first part of the year, and these especially “rushed” years of December drugs have even higher amounts of adverse effects associated with them.
Decomposing Present-value Effects: Evidence from a large-scale restructuring experiment
AbstractInterest rate changes only have a small effect on borrower cash flows, but a substantially larger effect on the present-value (PV) of future obligations. We study these remote and elusive balance sheet effects of interest rates in the context of consumer debt restructuring. We design and implement a large scale debt relief program where we deliberately vary the interest rate, maturity and payment schedules. We find that simple redenominations of the same face-value have significant effects on the borrowers decision to whether and when to default. Although rate reductions have a smaller effect on current resources compared to temporary forbearance, and a comparable effect in terms of magnitude and persistence as maturity extensions, its efficacy in reducing defaults is substantially higher. We formulate a test of fungibility and decisively reject models where the decision to default depends solely on current flows. However, we also find strong evidence against models where resources are fungible, and find that a dollar change in current cash flows has a similar effect on defaults as a three dollar change in the present-value of future payments. From the perspective of the financial institution, offering either type of debt-relief decreases recovery, however balance sheet effects are sufficiently strong to make it an efficient way to incentive intermediaries.
Can Partial Commitment Increase Pension Contribution? A Field Experiment in Sri Lanka
AbstractWe conduct several randomized controlled trials in more than 200 villages in Sri Lanka to study whether incentives and partial commitment pension designs generate higher participation and savings in the micro pension. In Experiment I, individuals are randomly assigned to a control group, a free installment group, and a matching group. We find that a free installment for the first month contribution increases the pension participation from 8 percentage points to 34 percentage points, and increases the pension contribution by 4 times. A 100% matching for the first month contribution also increases the participation and contributions, but the effect is smaller. We show that the results can be explained by that free Installment group attracts more present bias agents, and present bias agents are more likely to participate in the pension when they do not need to pay first month contribution. In Experiment II, we further compare a full commitment pension including only one commitment account with a partial commitment pension contract including a liquid account and a commitment account. Individuals are randomly assigned to four groups: full commitment pension with high withdraw penalty, partial commitment pension with low withdraw penalty, partial commitment pension with high withdraw penalty, and a choice group in which they choose full commitment or partial commitment with high withdraw penalty. We find that, partial commitment pension with high withdraw penalty and the choice group have 9.9 percentage points and 7.7 percentage points more participation compared to full commitment pension, respectively. We show that high commitment contract attracts more sophisticated agents, and higher degree of commitment increase the pension participation more for sophisticated agents. These results are consistent with the theory of optimal illiquidity.
- G2 - Financial Institutions and Services