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  2. ASSA Annual Meeting
  3. 2021
  4. Preliminary Program
  5. Household Finance
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Household Finance

Paper Session

Sunday, Jan. 3, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: American Finance Association
  • Chair: Taylor Begley, Washington University in St. Louis

Working More to Pay the Mortgage: Interest Rates and Labor Supply

Michal Zator
,
University of Notre Dame

Abstract

Using income tax data for the universe of Polish population and exploiting variation in floating-rate mortgage payments driven by inter-bank rates fluctuations, I show that households work and earn more when their mortgage payments are higher. Higher income covers around 35% of the increase in the payment. The effect is stronger for households with higher payment-to-income ratio and for more flexible income sources. The increase in labor supply is accompanied by a decrease in consumption and savings and is driven by several mechanisms, including spousal labor supply, change of job, and additional income from after-hours contracts. Consistent with a model of labor decisions with consumption commitments, interests rates can affect labor supply of mortgage holders, which has implications for monetary policy and debt relief policies.

Borrowing in Response to Windfalls

Arna Olafsson
,
Copenhagen Business School
Michaela Pagel
,
Columbia University

Abstract

We use high-accuracy and comprehensive transaction-level panel data containing information on all spending, income, balances, and credit limits of a representative sample of the Icelandic population. We document that the marginal propensity to consume (MPC) out of small windfalls due to lottery payments, i.e., perfectly temporary unexpected income shocks, is larger than one for the average individual. Furthermore, we document that individuals who receive small windfalls increase their short-term unsecured consumer debt, such as overdrafts, in response. This borrowing response is prevalent for individuals having relatively little as well as a lot of liquidity, i.e., borrowing capacity. The larger-than-one MPCs are thus financed using expensive consumer debt that is then rolled over for a considerable period of time. For large windfalls we only observe small MPCs and no borrowing responses. We also document that individuals do not increase their savings in response to either small or large windfalls. Our findings point to overconsumption problems driving both high MPCs as well as large consumer debt holdings and are clean evidence against liquidity constraints as an explanation for high MPCs out of windfalls.

Personal Bankruptcy, Moral Hazard, and Shadow Debt

Bronson Argyle
,
Brigham Young University
Benjamin Iverson
,
Brigham Young University
Taylor Nadauld
,
Brigham Young University
Christopher Palmer
,
Massachusetts Institute of Technology

Abstract

Using newly collected data on the balance sheets of personal bankruptcy filers, we develop an identification strategy to test for moral hazard in debt accumulation by bankruptcy filers. We find that debtors who are incentivized by policy changes to delay filing for bankruptcy incur significantly more unsecured debt before filing. A large share of the additional debt incurred by later filers is “shadow debt” — debt not reported to credit bureaus, comprising an average of 16% of total liabilities on personal bankruptcy filings. Finally, these results are not present among borrowers with employment, medical, or marriage shocks, reinforcing our interpretation of strategic behavior.
Discussant(s)
Amir Kermani
,
University of California-Berkeley
Deniz Aydin
,
Washington University in St. Louis
Arpit Gupta
,
New York University
JEL Classifications
  • G2 - Financial Institutions and Services