Diagnosing Consumer Confusion and Sub-optimal Shopping Effort: Theory and Mortgage-Market Evidence

By Susan E. Woodward and Robert E. Hall

American Economic Review, December 2012

Mortgage loans are leading examples of transactions where experts on one side of the market take advantage of consumers' lack of knowledge and experience. We study the compensation that borrowers pay to mortgage brokers for assistance from application to...

Life Insurance and Household Consumption

By Jay H. Hong and José-Víctor Ríos-Rull

American Economic Review, December 2012

Using life insurance holdings by age, sex, and marital status, we infer how individuals value consumption in different demographic stages. We estimate equivalence scales and bequest motives simultaneously within a fully specified model where agents face U...

Barriers to Household Risk Management: Evidence from India

By Shawn Cole, Xavier Giné, Jeremy Tobacman, Petia Topalova, Robert Townsend, and James Vickery

American Economic Journal: Applied Economics, January 2013

Why do many households remain exposed to large exogenous sources of nonsystematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and nonprice factors in the adoption of an innovative rainfall...

Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya

By Pascaline Dupas and Jonathan Robinson

American Economic Journal: Applied Economics, January 2013

Does limited access to formal savings services impede business growth in poor countries? To shed light on this question, we randomized access to noninterest-bearing bank accounts among two types of self-employed individuals in rural Kenya: market vendors...

Cognitive Abilities and Household Financial Decision Making

By Sumit Agarwal and Bhashkar Mazumder

American Economic Journal: Applied Economics, January 2013

We analyze the effects of cognitive abilities on two examples of consumer financial decisions where suboptimal behavior is well defined. The first example features the optimal use of credit cards for convenience transactions after a balance transfer and t...

Long-Term Impacts of Individual Development Accounts on Homeownership among Baseline Renters: Follow-Up Evidence from a Randomized Experiment

By Michal Grinstein-Weiss, Michael Sherraden, William G. Gale, William M. Rohe, Mark Schreiner, and Clinton Key

American Economic Journal: Economic Policy, February 2013

We examine the long-term effects of a 1998-2003 randomized experiment in Tulsa, Oklahoma with Individual Development Accounts that offered low-income households 2:1 matching funds for housing down payments. Prior work shows that, among households who r...

Entropy and the Value of Information for Investors

By Antonio Cabrales, Olivier Gossner, and Roberto Serrano

American Economic Review, February 2013

Consider an investor who fears ruin when facing investments that satisfy no-arbitrage. Before investing he can purchase information about the state of nature as an information structure. Given his prior, information structure α investment dominat...

Young Adult Obesity and Household Income: Effects of Unconditional Cash Transfers

By Randall Akee, Emilia Simeonova, William Copeland, Adrian Angold, and E. Jane Costello

American Economic Journal: Applied Economics, April 2013

We investigate the effect of household cash transfers during childhood on young adult body mass indexes (BMI). The effects of extra income differ depending on the household's initial socioeconomic status (SES). Children from the initially poorest househ...

The Effect of Language on Economic Behavior: Evidence from Savings Rates, Health Behaviors, and Retirement Assets

By M. Keith Chen

American Economic Review, April 2013

Languages differ widely in the ways they encode time. I test the hypothesis that the languages that grammatically associate the future and the present, foster future-oriented behavior. This prediction arises naturally when well-documented effects of la...

Inferior Good and Giffen Behavior for Investing and Borrowing

By Felix Kubler, Larry Selden, and Xiao Wei

American Economic Review, April 2013

The standard assumption that asset demand increases in income and decreases in price has its origin in Arrow's classic model with one risky and one risk free asset, where both are held long, and preferences exhibit decreasing absolute and increasing relat...

Can Owning a Home Hedge the Risk of Moving?

By Todd Sinai and Nicholas Souleles

American Economic Journal: Economic Policy, May 2013

For households that face a possibility of moving across MSAs, the risk of home owning depends on the covariance of the sale prices of their current houses with the purchase prices of their likely future houses. We find empirically that households tend ...

The Home Economics of E-Money: Velocity, Cash Management, and Discount Rates of M-Pesa Users

By Isaac Mbiti and David N. Weil

American Economic Review, May 2013

We study the mobile phone-based money transfer system in Kenya. Based on aggregate data, we estimate that the velocity with which units of e-money are transferred among users is approximately four times per month, and that the average number of transfers ...

Inheritances, Intergenerational Transfers, and the Accumulation of Health

By Katherine Grace Carman

American Economic Review, May 2013

This paper considers the mechanisms behind a positive correlation between inheritances and health. First, there may merely be a correlation: those from families with enough wealth to provide an inheritance tend to have better health. Second, financial res...

Income and Substitution Effects of Estate Taxation

By James R. Hines Jr.

American Economic Review, May 2013

This paper evaluates the effect of estate taxes on labor supply. The analysis decomposes the effect of estate taxation into the substitution effect of relative price changes and the two income effects for which the estate tax is responsible. These two inc...

Estate Taxation with Altruism Heterogeneity

By Emmanuel Farhi and Iván Werning

American Economic Review, May 2013

We develop a theory of optimal estate taxation in a model where bequest inequality is driven by differences in parental altruism. We show that a wide range of results are possible, from positive taxes to subsidies. The results depend on redistributive obj...

Optimal Progressive Labor Income Taxation and Education Subsidies When Education Decisions and Intergenerational Transfers Are Endogenous

By Dirk Krueger and Alexander Ludwig

American Economic Review, May 2013

We quantitatively characterize the optimal mix of progressive income taxes and education subsidies in a model with endogenous human capital formation, borrowing constraints, income risk and incomplete financial markets. In addition to the distortions of l...

Salience and Asset Prices

By Pedro Bordalo, Nicola Gennaioli, and Andrei Shleifer

American Economic Review, May 2013

We present a simple model of asset pricing in which payoff salience drives investors' demand for risky assets. The key implication is that extreme payoffs receive disproportionate weight in the market valuation of assets. The model accounts for several pu...

Why Don't the Poor Save More? Evidence from Health Savings Experiments

By Pascaline Dupas and Jonathan Robinson

American Economic Review, June 2013

Using data from a field experiment in Kenya, we document that providing individuals with simple informal savings technologies can substantially increase investment in preventative health and reduce vulnerability to health shocks. Simply providing a safe...

Safety Traps

By Kenza Benhima and Baptiste Massenot

American Economic Journal: Macroeconomics, October 2013

Fear of risk provides a rationale for protracted economic downturns. We develop a real business cycle model where investors with decreasing relative risk aversion choose between a risky and a safe technology that exhibit decreasing returns. Because of ...

The Wrong Shape of Insurance? What Cross-Sectional Distributions Tell Us about Models of Consumption Smoothing

By Tobias Broer

American Economic Journal: Macroeconomics, October 2013

This paper shows how two standard models of consumption risk-sharing—self-insurance through borrowing and saving and limited commitment to insurance contracts—replicate similarly well the standard, second-moment measures of insurance observed in US...