JOB MARKET PAPER
Wealth is distributed more unevenly than income, and one contributing factor might be that richer households earn higher portfolio returns. I uncover one channel that causes portfolio returns to be increasing in wealth: Poorer households consistently buy risky assets in booms—when expected returns are low—and sell after a bust—when expected returns are high. Although time-varying expected returns are a robust empirical fact, theories are ambiguous on whether poorer or richer households engage in such cyclical trading patterns. I estimate the trading patterns for households across wealth levels, in the US housing market for 1988-2013. I interact housing ownership patterns from deeds records with household-level wealth, which I infer from merging owners' surnames with their name-based income in the 1940 full Census. The estimated dispersion in expected returns from this “buy-high-sell-low” channel is large: The interquartile-range difference is 60 basis points per year. The channel predicts that geographies with historically higher volatility will feature more wealth inequality than income inequality: I verify this implication in the data. These results suggest that a government policy intended to boost poorer households' wealth via homeownership can backfire if it ignores the status of house prices.
(with Lancelot Henry de Frahan)
We estimate the intergenerational elasticity (IGE) of consumption. As a complementary analysis to income IGE, consumption mobility is a closer measure of welfare mobility, and comparisons with income IGE are informative about intergenerational consumption insurance (in a frictionless, dynastic benchmark, the consumption IGE is one). Using surnames as links, we merge income and home values from the 1940 full-count Census to today's home value as a proxy for consumption. We estimate a 70-year surname-level elasticity of 0.42. We construct an econometric methodology to infer family-level IGE of consumption from the surname-level data. Adjusting for surname vs. family and converting primary house value to overall consumption via the Engel curve, we estimate a 70-year family-level consumption IGE of 0.36. We document heterogeneity in the consumption IGE: blacks have much lower IGE than whites, the Northeast has higher IGE than the South and Midwest, and in particular, the black-white gap in IGE is concentrated in the Northeast. We discuss possible mechanisms behind the level and heterogeneity in the estimated IGE of consumption.
Foreign buyers from China have purchased around $150 billion of US residential real estate property in 2010-2017. To assess the impact of this large foreign asset demand in US local housing markets, I first identify Chinese holdings of US real estate properties using CoreLogic deed records and the 100 most common Chinese surnames. To estimate its causal impact on local housing markets, I instrument for Chinese ownership increases using: 1) historical Asian presence in the area, 2) flight time from China due to changes in flight routes, and 3) presence of the number four (an unlucky number in China) in the zip code. I find a large house price impact in the local housing market. Spillovers onto rental prices are theoretically ambiguous, but I find that rents decrease in response to Chinese investment demand, by spurring construction especially in areas with elastic housing supply. Lastly, I examine the impact on local residents' attitude toward foreigners, by using Google searches for ethnic slurs and voting in the 2016 presidential election.
Following the Obama presidency, pundits and researchers have asked how having a black leader affects white Americans’ attitude toward black Americans. Given theoretical ambiguity, I test for causal impact of a black leader on racial attitudes using local elections of black politicians at the municipal level. Using Race Implicit Attitude Test (IAT) scores as a measure of racial prejudice and close election regression discontinuity design for causal inference, I find that electoral victory of a black leader leads to a rise in racial prejudice among white Americans against black Americans. Following a close electoral victory, the IAT score rises by about 0.03, or 7% of the average black-white difference. Simultaneously, using the same discontinuity design, black politicians’ electoral victory causes lower employment and higher mortgage denial for black Americans relative to white Americans. By ruling out other channels by which electoral victory could adversely affect black Americans’ relative economic outcome, I argue that the rise in prejudice caused black-white economic inequality to widen.
Does deteriorating economic condition cause racial prejudice to rise? Despite psychological/sociological microfoundations and multiple economic implications of the inferiority of racial prejudice, empirical evidence has been inconclusive. This paper constructs better-powered measures of local areas' racial prejudice using Google searches for racial slur and "KKK," white-on-black non-pecuniary crime, survey responses and corporal punishment at school. Across these measures, racial prejudice correlates negatively with the local economic condition. Using predictors of local economic condition in the 2000s, I show that the relationship is causal: lower income causes higher racial prejudice in the area.
Market Power as Skin-in-the-Game
(with Paymon Khorrami)
We show that, when households have mistaken beliefs or less information, intermediary market power can limit over-investment, improve resource allocation, and reduce asset price volatility. If intermediaries are compensated based on their returns, market power increases their compensation, leading to better incentives to invest according to the social good. The results are analogous if intermediaries are compensated based on assets under management in a dynamic world: market power creates skin-in-the-game incentives, even if they are absent in the contract. We devise a series of empirical tests, in both finance and non-finance arenas, as to the interacting effects of household irrationality and intermediary competition.
Journal of Public Economics, revision requested
(with John Beshears, James Choi, Christopher Harris, David Laibson and Brigitte Madrian)
Previous research has shown that some people voluntarily use commitment contracts that restrict their own choice sets. We use an experiment to study how people divide money between two accounts: a liquid account that permits unrestricted withdrawals and a commitment account that is randomly assigned between subjects to have a 10% early withdrawal penalty, a 20% early withdrawal penalty, or not allow early withdrawals (which is like an infinite penalty). When the two accounts pay the same interest rate, higher penalties attract more commitment account deposits, suggesting that some participants are sophisticated present-biased agents who understand the commitment benefits of higher penalties. However, the experiment also shows that when the commitment account pays a higher interest rate than the liquid account, the empirical relationship between penalties and commitment deposits is flat, suggesting that naïve present-biased agents or agents without present bias are also in our sample.
Supplement: Online Appendix