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Household Debt and Savings

Paper Session

Sunday, Jan. 5, 2020 1:00 PM - 3:00 PM (PDT)

Manchester Grand Hyatt, Seaport F
Hosted By: American Finance Association
  • Chair: Gregor Matvos, University of Texas-Austin

Perceived Precautionary Savings Motives: Evidence from FinTech

Francesco D'Acunto
,
Boston College
Thomas Rauter
,
University of Chicago
Christoph Scheuch
,
Vienna University of Economics and Business
Michael Weber
,
University of Chicago

Abstract

We study the consumption response to the provision of credit lines to individuals that previously did not have access to credit combined with the possibility to elicit directly a large set of preferences, beliefs, and motives. As expected, users react to the availability of credit by increasing their spending permanently and reallocating consumption from non-discretionary to discretionary goods and services. Surprisingly, though, liquid users react more than others and this pattern is a robust feature of the data. Moreover, liquid users lower their savings rate, but do not tap into negative deposits. The credit line seems to act as a form of insurance against future negative shocks and its mere presence makes users spend their existing liquidity without accumulating any debt. By eliciting preferences, beliefs, and motives directly, we show these results are not fully consistent with models of financial constraints, buffer stock models with and without durables, present-bias preferences, uncertainty about future income, bequest motives, or the canonical life-cycle permanent income model. We label this channel the perceived precautionary savings channel, because liquid households behave as if they faced strong precautionary savings motives even though no observables suggest they should based on standard theoretical models.

Medicaid and Household Savings Behavior: New Evidence from Tax Refunds

Emily Gallagher
,
University of Colorado Boulder
Radhakrishnan Gopalan
,
Washington University-St. Louis
Michal Grinstein-Weiss
,
Washington University-St. Louis
Jorge Sabat
,
Washington University-St Louis

Abstract

Using data on over 57,000 low-income tax filers, we estimate the effect of Medicaid access on the propensity of households to save or repay debt from their tax refunds. We instrument for Medicaid access using variation in state eligibility rules. We find substantial heterogeneity across households in the savings response to Medicaid. Households that are not experiencing financial hardship behave in a manner consistent with a precautionary savings model, meaning they save less under Medicaid. In contrast, among households experiencing financial hardship, Medicaid eligibility increases refund savings rates by roughly 5 percentage points or $102. For both sets of households, effects are stronger in states with lower bankruptcy exemption limits – consistent with uninsured, financially constrained households using bankruptcy to manage health expenditure risk. Our results imply that expansions to the social safety net may affect the magnitude of the consumption response to tax rebates.

Reducing Barriers to Enrollment in Federal Student Loan Repayment Plans: Evidence from the Navient Field Experiment

Holger Mueller
,
New York University
Constantine Yannelis
,
University of Chicago

Abstract

To reduce student loan delinquency and default, the federal government provides income-driven repayment (IDR) plans in which monthly student loan payments depend on the borrower’s discretionary income. However, take-up of IDR plans remains incomplete despite federal subsidies and outreach efforts by student loan servicers and the government. This study reports evidence from a randomized field experiment conducted by a major student loan servicer, Navient, in which treated borrowers received pre-populated IDR applications for electronic signature. As a result, IDR enrollment increased by 34 percentage points relative to borrowers in the control group. Using treatment assignment as an instrument for IDR enrollment, we present LATE estimates of the impact of IDR enrollment on new delinquencies, monthly payments, and consumer spending. Our estimates imply a drop in monthly payments of $355 and a reduction in new delinquencies of seven percent. At the same time, credit card balances increase by $343, implying that the freed-up liquidity is almost entirely used for consumer spending.
Discussant(s)
Greg Buchak
,
University of Chicago
Timothy McQuade
,
Stanford University
Tim Landvoigt
,
University of Pennsylvania
JEL Classifications
  • G1 - General Financial Markets