The Welfare Economics of Default Options in 401(k) Plans

By B. Douglas Bernheim, Andrey Fradkin, and Igor Popov

American Economic Review, September 2015

Default contribution rates for 401(k) pension plans powerfully influence choices. Potential causes include opt-out costs, procrastination, inattention, and psychological anchoring. Using realistically parameterized models, we show how the optimal default,...

Disability Insurance and the Dynamics of the Incentive Insurance Trade-Off

By Hamish Low and Luigi Pistaferri

American Economic Review, October 2015

We provide a life-cycle framework for comparing insurance and disincentive effects of disability benefits. The risks that individuals face and the parameters of the Disability Insurance (DI) program are estimated from consumption, health, disability insur...

Human Capital Risk, Contract Enforcement, and the Macroeconomy

By Tom Krebs, Moritz Kuhn, and Mark L. J. Wright

American Economic Review, November 2015

We use microdata to show that young households with children are underinsured against the risk that an adult member of the household dies. This empirical finding can be explained by a macroeconomic model with human capital risk, age-dependent returns to h...

Optimal Annuitization with Stochastic Mortality and Correlated Medical Costs

By Felix Reichling and Kent Smetters

American Economic Review, November 2015

The conventional wisdom since Yaari (1965) is that households without a bequest motive should fully annuitize their investments. Numerous frictions do not break this sharp result. We modify the Yaari framework by allowing a household's mortality risk itse...

Bankruptcy: Is It Enough to Forgive or Must We Also Forget?

By Ronel Elul and Piero Gottardi

American Economic Journal: Microeconomics, November 2015

In many countries, lenders are restricted in their access to information about borrowers' past defaults. We study this provision in a model of repeated borrowing and lending with moral hazard and adverse selection. We analyze its effects on borrowers' inc...

The Effects of Medicare on Medical Expenditure Risk and Financial Strain

By Silvia Helena Barcellos and Mireille Jacobson

American Economic Journal: Economic Policy, November 2015

Medicare offers substantial protection from medical expenditure risk, protection that has increased in recent years. At age 65, out-of-pocket expenditures drop by 33 percent at the mean and 53 percent at the ninety-fifth percentile. Medical-related financ...

The Impact of Regulation on Mortgage Risk: Evidence from India

By John Y. Campbell, Tarun Ramadorai, and Benjamin Ranish

American Economic Journal: Economic Policy, November 2015

We employ loan-level data on over a million loans disbursed in India between 1995 and 2010 to understand how fast-changing regulation impacted mortgage lending and risk. Our paper uses changes in regulatory treatment discontinuities associated with loan s...

Overconfident Investors, Predictable Returns, and Excessive Trading

[Symposium: Overconfidence]

By Kent Daniel and David Hirshleifer

Journal of Economic Perspectives, Fall 2015

The last several decades have witnessed a shift away from a fully rational paradigm of financial markets toward one in which investor behavior is influenced by psychological biases. Two principal factors have contributed to this evolution: a body of...

A Theory of Rational Demand for Index Insurance

By Daniel J. Clarke

American Economic Journal: Microeconomics, February 2016

Rational demand for index insurance products is shown to be fundamentally different to that for indemnity insurance products due to the presence of basis risk. In particular, optimal demand is zero for infinitely risk-averse individuals, and is nonmonoton...

The Vulnerability of Minority Homeowners in the Housing Boom and Bust

By Patrick Bayer, Fernando Ferreira, and Stephen L. Ross

American Economic Journal: Economic Policy, February 2016

This paper examines mortgage outcomes for a large sample of individual home purchases and refinances linked to credit scores in seven major US markets. Among those with similar credit scores and loan attributes, black and Hispanic homeowners had much high...

Poverty and Economic Decision-Making: Evidence from Changes in Financial Resources at Payday

By Leandro S. Carvalho, Stephan Meier, and Stephanie W. Wang

American Economic Review, February 2016

We study the effect of financial resources on decision-making. Low-income US households are randomly assigned to receive an online survey before or after payday. The survey collects measures of cognitive function and administers risk and intertemporal cho...

Consumption Inequality and Family Labor Supply

By Richard Blundell, Luigi Pistaferri, and Itay Saporta-Eksten

American Economic Review, February 2016

We examine the link between wage and consumption inequality using a life-cycle model incorporating consumption and family labor supply decisions. We derive analytical expressions for the dynamics of consumption, hours, and earnings of two earners in the p...

University Differences in the Graduation of Minorities in STEM Fields: Evidence from California

By Peter Arcidiacono, Esteban M. Aucejo, and V. Joseph Hotz

American Economic Review, March 2016

We examine differences in minority science graduation rates among University of California campuses when racial preferences were in place. Less prepared minorities at higher ranked campuses had lower persistence rates in science and took longer to grad...

Liquidity Trap and Excessive Leverage

By Anton Korinek and Alp Simsek

American Economic Review, March 2016

We investigate the role of macroprudential policies in mitigating liquidity traps. When constrained households engage in deleveraging, the interest rate needs to fall to induce unconstrained households to pick up the decline in aggregate demand. If the...

Taxpayer Confusion: Evidence from the Child Tax Credit

By Naomi E. Feldman, Peter Katuščák, and Laura Kawano

American Economic Review, March 2016

We develop an empirical test for whether households understand or misperceive their marginal tax rate. Our identifying variation comes from the loss of the Child Tax Credit when a child turns 17. Using this age discontinuity, we find that despite this ...

A Road Map for Efficiently Taxing Heterogeneous Agents

By Marios Karabarbounis

American Economic Journal: Macroeconomics, April 2016

This paper characterizes optimal labor income taxes that depend on age, household assets, and filing status (one or two earners) within a life-cycle model with heterogeneous, two-member households. The key innovation is a labor supply elasticity that vari...

The Impact of Insurance Provision on Household Production and Financial Decisions

By Jing Cai

American Economic Journal: Economic Policy, May 2016

This paper uses a natural experiment to study the impact of an agricultural insurance program on household production, borrowing, and saving behavior. The empirical strategy includes difference-in-differences and triple difference estimations. The resu...

Assessing Financial Education: Evidence from Boot Camp

By William Skimmyhorn

American Economic Journal: Economic Policy, May 2016

This study estimates the effects of Personal Financial Management Course attendance and enrollment assistance using a natural experiment in the US Army. New enlistees' course attendance reduces the probability of having credit account balances, average...

Restoring Rational Choice: The Challenge of Consumer Financial Regulation

By John Y. Campbell

American Economic Review, May 2016

This lecture considers the case for consumer financial regulation in an environment where many households lack the knowledge to manage their financial affairs effectively. The lecture argues that financial ignorance is pervasive and unsurprising given the...

Russia's Billionaires

By Daniel Treisman

American Economic Review, May 2016

Using data collected by Forbes since the 1990s, I examine the emergence and survival of the super-wealthy in Russia over the past two decades and compare Russia's record to those of other countries. The major surge in the number of Russian billionaires ca...