Finance and Inequality
Paper Session
Sunday, Jan. 9, 2022 10:00 AM - 12:00 PM (EST)
- Chair: Kelly Shue, Yale University
How Costly is Noise? Data and Disparities in the United States Mortgage Market
Abstract
We show that lenders face more uncertainty when assessing default risk of historically under-served groups in US credit markets and that this information disparity is a quantitatively important driver of inequitable and inefficient credit market outcomes. We first document that widely used credit scores are statistically noisier indicators of default risk for historically under-served groups. This noise emerges primarily through the explanatory power of the underlying credit report data (e.g., thin credit files), not through issues with model fit (e.g., the inability to include protected class in the scoring model). Estimating a structural model, we quantify the gains from addressing these information disparities for the US mortgage market. We find that equalizing the precision of credit scores can shrink disparities in approval rates and in credit misallocation for disadvantaged groups by roughly half.Wealth Inequality: Opportunity or Unfairness
Abstract
This paper presents evidence of a new propagation mechanism for wealth inequality, based on differential responses, by education, to greater inequality at the start of economic life. It is motivated by a novel positive cross-country relationship between wealth inequality and perceptions of opportunity and fairness, which holds only for the more educated. Using unique administrative micro data and a quasi-field experiment of exogenous allocation of households, the paper finds that exposure to a greater top 10% wealth share at the start of economic life in the country leads only the more educated placed in locations with above-median wealth mobility to higher wealth levels and position in the cohort-specific wealth distribution later on. Underlying this effect is greater participation in risky financial and real assets and in self-employment, with no evidence for a labor income, unemployment risk, or human capital investment channel. This differential response is robust to controlling for initial exposure to other local features, including income inequality, and consistent with self-fulfilling responses of the more educated to perceived opportunities, without evidence of imitation or learning from those at the top.Monetary Policy, Labor Income Redistribution and the Credit Channel: Evidence from Matched Employer-Employee and Credit Registers
Abstract
We show that softer monetary policy reduces labor income inequality via the credit channel. For identification, we exploit administrative matched datasets in Portugal - employee-employer and credit register - and monetary changes since the Eurozone creation in 1999. We find that softer monetary policy conditions reduce labor earnings differentials across firms and workers in the economy. Small and young firms increase workers' wages the most and the effects are particularly strong for firms that are more levered. We also find that workers that benefit the most from looser monetary policy are young, educated and female. Similar results also hold for firm-level employment and workers' total hours worked. Our findings uncover a central role for the firm balance sheet and the bank lending channels of the transmission of monetary policy to labor income inequality, with state-dependent effects that are substantially stronger during crisis times.JEL Classifications
- G0 - General