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 ClusterInstitutions and Social Norms
Does Social Capital Matter in Corporate Decisions? Evidence from Corporate Tax Avoidance
in: Journal of Accounting Research , forthcoming
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.
Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds
in: Journal of Financial and Quantitative Analysis , forthcomingread publication
The Effect of Personal Bankruptcy Exemptions on Investment in Home Equity
in: Journal of Financial Intermediation , 2016
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.
Non-Linearity in the Finance-Growth Nexus: Evidence from Indonesia
in: International Economics , 2017
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.
College Choice Allocation Mechanisms: Structural Estimates and Counterfactuals
in: IZA Discussion Paper, Heft 8550 , No. 8550, 2014
We evaluate a simple allocation mechanism of students to majors at college entry that was commonly used in universities in Brazil in the 1990s and 2000s. Students first chose a single major and then took exams that select them in or out of the chosen major. The literature analyzing student placement, points out that this decentralized mechanism is not stable and is not strategy-proof. This means that some pairs of major & students can be made better off and that students tend to disguise their preferences using such a mechanism. We build up a model of performance and school choices in which expectations are carefully specified and we estimate it using cross-section data reporting choices between two medical schools and grade performances at the entry exams. Given those estimates, we evaluate changes in selection and students’ expected utilities when other mechanisms are implemented. Results highlight the importance of strategic motives and redistributive effects of changes of the allocation mechanisms.
College Choice and the Selection of Mechanisms: A Structural Empirical Analysis
in: IWH Discussion Papers , No. 3, 2016
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.
Censored Fractional Response Model: Estimating Heterogeneous Relative Risk Aversion of European Households
in: IWH Discussion Papers , No. 11, 2015
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.
The Premium of Government Debt: Disentangling Safety and Liquidity
in: IWH Discussion Papers , No. 11, 2017
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.