CEPR European Conference on Household Finance 2019: Summary

CEPR European Conference on Household Finance 2019

September 2019

By Yigitcan Karabulut

Frankfurt School of Finance and Management and CEPR

The 2019 edition of the CEPR European Conference on Household Finance, held with the support of the Think Forward Initiative, took place on 20-21 September in Rhodes, Greece. This summary describes the main themes emerging from the papers presented at the conference.

The 2019 edition of the European Workshop on Household Finance was organized by the CEPR Network on Household Finance. The local organizers for this edition were Alex Michaelides and Michael Haliassos. The Workshop was sponsored by Copenhagen Business School, EDHEC Business School, London Business School, Swedish House of Finance, and the Think Forward Initiative.

The Network runs the European Conference on Household Finance in the autumn of each year since 2015, with its origins back to 2010, alongside its Spring Workshop launched in 2016. On the evening before, the Think Forward Initiative and CEPR organize an event that includes a panel discussion around issues of topical interest. This edition’s event was organized by Adreas Fuster and Amit Seru and focused on “Bigtech and Fintech” (for information, see here). This summary presents the main themes that emerged from papers presented at the conference.

Product Design and Household Economic Behavior

It is well-documented that many households make suboptimal investment and financial choices that have long-lasting effects on wealth accumulation and their economic well-being. A natural question is whether financial product providers and regulators can help households limit their financial mistakes.

Using a comprehensive administrative panel of Swedish households, Calvet, Celerier, Sodini, and Vallee (2019) study how security design affects household financial behavior. The authors document that the introduction of capital-protected investments and their broad adoption significantly foster household financial risk taking, with the effect being more pronounced among households exhibiting a high reluctance to take financial risk before the introduction of such products. The authors also investigate theoretically the possible underlying economic mechanism and find that disappointment aversion and narrow framing have the potential to explain their findings.

Despite the extensive literature on the short-term effects of automatic enrollment in retirement savings plans on household savings, little is known about the long-term effects of such policies. This is particularly important, as this policy’s main objective is to increase retirement security. Accordingly, Choukhmane (2019) studies whether automatic enrollment in retirement savings plans increases lifetime wealth accumulation and welfare. The author documents that employees seem to offset the short-run positive effect of automatic enrollment by saving less in the future. A lifecycle model estimated on data from U.S. retirement savings plans predicts that the long-term effect of auto-enrollment on wealth is negligible except at the bottom of the lifetime earnings distribution.

House prices and household wealth

Housing constitutes the largest share of assets owned for most households. The highly leveraged nature of housing investments as well as their importance in household portfolios, especially in retirement, make understanding household decisions in the housing market and dynamics of house prices crucial.

Andersen, Badarinza, Liu, Marx, and Ramadorai (2019) formally model household listing behavior in the housing market, and structurally estimate household preference and constraint parameters using data on all transactions and electronic listings of owner-occupied housing in Denmark. The authors find that sellers optimize expected utility from property sales, subject to down-payment constraints, and internalize the effect of their choices on final sale prices and time on-the-market. A novel fact that the authors document is that gains and down-payment constraints have interactive effects on listing prices. The authors further show that, in the housing market, households exhibit reference dependence around the nominal purchase price and modest loss-aversion.

Martinez-Toledano (2019) focuses on the distributional effects of house price changes and studies the implications of housing booms and busts for wealth inequality in Spain. Using rich micro and macro data, the author first develops a new asset-specific decomposition of wealth accumulation, and shows that the tail inequality, as measured by the top 10% wealth share, decreases during housing booms, while the decreasing pattern reverts during bust periods. She further shows that differences in capital gains along the wealth distribution seem to be the main driver of the drop in wealth concentration during housing busts, whereas persistent differences in saving rates across wealth groups and portfolio rebalancing towards financial assets among the rich households appear to derive the reverting evolution in wealth concentration during housing busts.

McGee (2019) develops and estimates a structural model of retirement saving decisions with realistic risks, housing, and heterogeneity in bequest preferences. Exploiting exogenous policy changes, the author shows that estimated bequest motives differ across households and roughly half of the sample has no bequest motive. Housing explains a substantial fraction of the level of wealth holdings in retirement, and a large fraction of increases in house prices are passed on to future generations.

Stock Market, Monetary Policy, and Household Consumption

Ampudia, Cooper, Le Blanc, and Zhu (2019) use a life-cycle framework to study household choices and their implications for the effects of monetary policy on household consumption, and show that monetary policy, operating through its effects on household income and asset market returns, has a differential impact on individuals within and across countries. The authors show that poorer households tend to respond more to the income variations produced by monetary policy innovations, whereas rich households respond more to policy-induced variations in stock returns.

Using detailed individual level information, Braeuer, Hackethal, and Hanspal (2019) study why investors buy dividend-paying assets and how they time their consumption accordingly to anticipated income. The authors show that private consumption is excessively sensitive to dividend income and that individuals increase their spending precisely around dividend receipt. Their findings also suggest that excess sensitivity is driven by financially sophisticated individuals who anticipate dividend income and plan to consume out of dividends.

Calvo-Pardo (2009) studies the effect of subjective return expectations on the financial risk-taking behavior of French households. The author first documents widespread dispersion in beliefs about current and future stock market performance among households. Using both theoretical and empirical methods, he further shows that attention to current market conditions influences the

decision to hold stocks through its effect on the expectation of a positive stock market return, particularly among the young and the wealthier households.

Household Debt and Technology

Fos, Hamdi, Kalda, and Nickerson (2019) study the role of the rise of gig-economy in household response to job loss by studying the introduction of Uber across different geographic regions in the US. The authors show that laid-off employees with access to Uber are less likely to apply for unemployment insurance benefits, rely less on household debt, and experience fewer delinquencies, suggesting that the introduction of Uber had a profound effect on labor markets.

Pursiainen (2019) develops a misreporting index and investigates the implications and determinants of borrower misreporting in peer-to-peer loans for credit card debt repayment and consolidation. The author finds that his misreporting index displays significant predictive power for the likelihood of defaults, which seems not to be incorporated in loan prices in the form of higher interest rates. Further analysis suggests that misreporting is more prevalent in areas with lower social capital, among borrowers who face greater income uncertainty or whose professions are considered less honest.

Intra-Household Asset Allocation and Insurance

Intra-household allocation of financial products and powers forms a budding literature in household finance. Andersen, Johannesen, and Sheridan (2019) focus on intra-family insurance by exploiting a rich transaction-level data on income, spending and intra-family bank transfers between parents and their children. The authors show that cash transfers from parents to children respond little to the changes in child income, but still constitute an important source of insurance for children who are in the bottom of the income distribution, and notably when their parents are wealthy.

Using transaction level data, Kukk and van Raaij (2019) focus on the distribution of financial assets within a household by studying the effects of having a joint or individual account on the saving behavior of household members. The authors show that savings are not equally allocated for the majority of the sampled households. Surprisingly, they also find that having joint accounts results in a more uneven distribution of savings across the partners within a household.