25 Years IWH

Dynamic Discrete Choices of Individuals

This research group belongs to the IWH Research Cluster Institutions and Social Norms. In our daily life, most economic decisions are discrete choices, such as whether to buy and which one to choose. The projects of this research group focus more the dynamic discrete choices of individuals since they often face uncertainty, which requires us to employ more structural models to describe the individual decision making mechanism. There are mainly two branches of projects within the research group: household finance decisions and application of matching theory. Within household finance, first, we want to learn the true risk preference of the households based on the observed household investment decisions using a revealed preference approach. We are particularly interested in the risky asset holding behaviour and housing decisions. A second workpackage will focus on the heterogeneity of risk preference across households and across different countries. The other branch of this research group will focus on the application of matching theory in empirical studies of education choices, college major choice in particular, and discrete choices in the labour market such as the job searching process.

Research Cluster
Institutions and Social Norms

Your contact

Professor Qizhou Xiong, PhD
Professor Qizhou Xiong, PhD
Mitglied - Department Financial Markets
Send Message +49 345 7753-756

Refereed Publications

Non-linearity in the Finance-Growth Nexus: Evidence from Indonesia

Wahyoe Soedarmono Iftekhar Hasan Nuruzzaman Arsyad

in: International Economics , 2017

Abstract

This paper investigates the finance-growth nexus where bank credit is decomposed into investment, consumption, and working capital credit. From a panel dataset of provinces in Indonesia, it documents that higher financial development measured by financial deepening and financial intermediation exhibits an inverted U-shaped relationship with economic growth. This non-linear effect of financial deepening is driven by both investment credit and consumption credit. These results suggest that too much investment credit and, to a lesser extent, consumption credit are detrimental to economic growth. Ultimately, only financial intermediation associated with working capital credit has a positive and monotonic impact on economic growth.

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Does Social Capital Matter in Corporate Decisions? Evidence from Corporate Tax Avoidance

Iftekhar Hasan Chun-Keung (Stan) Hoi Qiang Wu Hao Zhang

in: Journal of Accounting Research , No. 3, 2017

Abstract

We investigate whether the levels of social capital in U.S. counties, as captured by strength of civic norms and density of social networks in the counties, are systematically related to tax avoidance activities of corporations with headquarters located in the counties. We find strong negative associations between social capital and corporate tax avoidance, as captured by effective tax rates and book-tax differences. These results are incremental to the effects of local religiosity and firm culture toward socially irresponsible activities. They are robust to using organ donation as an alternative social capital proxy and fixed effect regressions. They extend to aggressive tax avoidance practices. Additionally, we provide corroborating evidence using firms with headquarters relocation that changes the exposure to social capital. We conclude that social capital surrounding corporate headquarters provides environmental influences constraining corporate tax avoidance.

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Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds

Iftekhar Hasan Chun-Keung (Stan) Hoi Qiang Wu Hao Zhang

in: Journal of Financial and Quantitative Analysis , No. 3, 2017

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The Effect of Personal Bankruptcy Exemptions on Investment in Home Equity

S. Corradin Reint E. Gropp H. Huizinga Luc Laeven

in: Journal of Financial Intermediation , 2016

Abstract

Homestead exemptions to personal bankruptcy allow households to retain their home equity up to a limit determined at the state level. Households that may experience bankruptcy thus have an incentive to bias their portfolios towards home equity. Using US household data for the period 1996 to 2006, we find that household demand for real estate is relatively high if the marginal investment in home equity is covered by the exemption. The home equity bias is more pronounced for younger and less healthy households that face more financial uncertainty and therefore have a higher ex ante probability of bankruptcy. These results suggest that homestead exemptions have an important bearing on the portfolio allocation of US households and the extent to which they insure against bad shocks.

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Working Papers

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Do We Want These Two to Tango? On Zombie Firms and Stressed Banks in Europe

Manuela Storz Michael Koetter Ralph Setzer Andreas Westphal

in: ECB Working Paper , 2017

Abstract

We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that “zombie” firms generally continued to lever up during the 2010–2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms.

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Do We Want These Two to Tango? On Zombie Firms and Stressed Banks in Europe

Manuela Storz Michael Koetter Ralph Setzer Andreas Westphal

in: IWH Discussion Papers , No. 13, 2017

Abstract

We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that “zombie” firms generally continued to lever up during the 2010–2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms.

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The Premium of Government Debt: Disentangling Safety and Liquidity

Qizhou Xiong

in: IWH Discussion Papers , No. 11, 2017

Abstract

The persistent premium of government debt attributes to two main reasons: absolute nominal safety and liquidity. This paper employs two types of measures of government debt supply to disentangle the safety and liquidity part of the premium. The empirical evidence shows that, after controlling for the opportunity cost of money, the quantitative impact of total government debt-to-GDP ratio is still significant and negative, which is consistent with the theoretical predictions of the CAPM with utility surplus of holding convenience assets. The relative availability measure, the ratio of total government liability to all sector total liability, separates the liquidity premium from the safety premium and has a negative impact too. Both theoretical and empirical results suggest that the substitutability between government debt and private safe assets dictates the quantitative impact of the government debt supply.

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College Choice and the Selection of Mechanisms: A Structural Empirical Analysis

J.-R. Carvalho T. Magnac Qizhou Xiong

in: IWH Discussion Papers , No. 3, 2016

Abstract

We use rich microeconomic data on performance and choices of students at college entry to study the interaction between the revelation of college preferences through exams and the selection of allocation mechanisms. We propose a method in which preferences and expectations of students are identified from data on choices and multiple exam grades. Counterfactuals we consider balance costs arising from congestion and exam organization. Moving to deferred acceptance or inverting the timing of choices and exams are shown to increase welfare. Redistribution among students or schools is sizeable in all counterfactual experiments.

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Censored Fractional Response Model: Estimating Heterogeneous Relative Risk Aversion of European Households

Qizhou Xiong

in: IWH Discussion Papers , No. 11, 2015

Abstract

This paper estimates relative risk aversion using the observed shares of risky assets and characteristics of households from the Household Finance and Consumption Survey of the European Central Bank. Given that the risky share is a fractional response variable belonging to [0, 1], this paper proposes a censored fractional response estimation method using extremal quantiles to approximate the censoring thresholds. Considering that participation in risky asset markets is costly, I estimate both the heterogeneous relative risk aversion and participation cost using a working sample that includes both risky asset holders and non-risky asset holders by treating the zero risky share as the result of heterogeneous self-censoring. Estimation results show lower participation costs and higher relative risk aversion than what was previously estimated. The estimated median relative risk aversions of eight European countries range from 4.6 to 13.6. However, the results are sensitive to households’ perception of the risky asset market return and volatility.

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