Assistant Professor of Finance
Kellogg School of Management
Household Finance, Public Finance,
Macroeconomics, Consumption Behavior
Consumer Behavior and Savings Decisions
Abstract: Using new transaction data I show that consumption is excessively sensitive to large, predetermined, regular, and salient payments from the Alaska Permanent Fund, with a large average marginal propensity to consume (MPC) of 25% for nondurables and services and 60% for total expenditures. However, this deviation from the standard inter-temporal consumption model is concentrated among households for whom the loss from failing to smooth consumption is small in terms of equivalent variation. In particular, the MPC is increasing in household income but decreasing in the size of the loss. As a result, statistically significant excess sensitivity in response to these large payments is consistent with households following near-rational alternative consumption plans. For macroeconomic policies, such as an economic stimulus program, these near-rational alternatives might be the more relevant behavior than the standard consumption model. Repeating the analysis with the Consumer Expenditure Survey (CEX) shows that credit constraints also predict larger MPCs for lower-income households, who are underrepresented in the transaction data. Finally, measurement error and composition effects fully explain the attenuated average MPC in the CEX.
July 2015: new!
Abstract: This paper derives two measures of expected Alaska Permanent Fund Dividends (PFD), which are large annual payments to most Alaskan residents. The first measure is based on a narrative analysis of all major Alaskan newspapers from 1982 to 2014. The second is derived from new data from 1991 to 2014 of the Permanent Fund's income from assets, which largely determines the size of the annual dividend per person. Additional information about the PFD is provided that will help those who plan to use this quasi-natural experiment for future research.
Abstract: This paper revisits the important contribution of Hsieh (2003) to the analysis of the intertemporal allocation of household consumption. Using total expenditures to normalize income from the Alaska Permanent Fund Dividend instead of family income and an extended sample of the Consumer Expenditure Survey (CE), I show that log household spending on nondurables is excessively sensitive to the arrival of this predetermined cash flow, with a statistically significant elasticity between 13% and 17%. The previously estimated non-response can largely be attributed to attenuation bias introduced by substantial measurement error in self-reported before-tax family income, in particular over-reporting of very small values.
[data and programs]
Abstract: We use the Anti-Alcohol Campaign in 1986 and the rapid expansion of the beer market after the collapse of the Soviet Union as two quasi-natural experiments to identify highly persistent habit formation in alcohol consumption among Russian males. Importantly, these results apply to all levels of alcohol consumption and are not driven by heavy drinking or alcoholism. The two large shocks combined with persistent habits lead to large cohort differences in consumer behavior even decades later. We derive a basic model of habit formation with homogeneous preferences over two habit-forming goods, which is consistent with these facts. Using placebo tests as well as simple descriptive statistics, we show that habits are formed during early adulthood and remain largely unaffected afterward. The main alternative hypotheses such as income effects, unobserved taste heterogeneity, stepping-stone effects, and changes in culture or social norms are inconsistent with those patterns. Using the experiments as IVs, we estimate the first-order autoregressive coefficient to be 0.83, which is almost three times larger than its OLS estimate. Finally, our results suggest that male mortality in Russia will decrease by one quarter within twenty years even under current policies and prices due to the long-run consequences of the large changes in the alcohol market.
with Evgeny Yakovlev, May 2015: new version! [online appendix] [NBER Working Paper]
In the media: Voxeu.org, The Motley Fool, New York Times
Abstract: Although theoretical models of household behavior often emphasize fiscal foresight, most empirical studies neglect the role of news, thereby potentially underestimating the total effect of tax changes. Using novel high-frequency bond data, I develop a model of the term structure of municipal yield spreads as a function of future top income tax rates and a risk premium. Testing the model using the presidential elections of 1992 and 2000 as two natural experiments shows that financial markets forecast future tax rates remarkably well in both the short and long run. Combining these market-based tax expectations with consumption data from the Consumer Expenditure Survey, I find that consumption of high-income households increases by close to 1% in response to news of a 1% increase in expected after-tax lifetime income, consistent with the basic rational-expectations life-cycle theory.
Market-Based Income Tax Expectations: Anticipation of the Reagan Tax Cuts
Note: This video shows the evolution of the path of market-based expected tax rates from the beginning of the Carter administration in January 1977 through the first year of the Reagan administration. With a forecast horizon of 1 to 15 years, the movie shows when markets begin to anticipate the Reagan tax cuts, and how persistent they expect these tax shocks to be. The paths of expected tax rates are calculated from the term structure of yield spreads between Treasury and municipal bonds between 1/1977 and 8/1982. The time series of the actual effective top 1% tax rate (i.e., the perfect foresight tax rate) is based on Saez (2004).
Abstract: We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.
In the media: CBS News, Econbrowser (non-technical summary), Handelsblatt, Economist's View, Marginal Revolution, CentralBanking.com, Berkeley Blog, The Economist, The Economist II, Slate.com, Financial Times, New York Times
Abstract: Even with well-developed capital markets, there is no private market mechanism for trading between current and future generations, so a potential role for public old-age pension systems is to spread economic and demographic shocks among different generations. This paper evaluates the risk-spreading effects of three pay-as-you-go public pension schemes, based on the actual U.S. and German systems, which vary in the extent to which they rely on tax adjustments versus benefit adjustments to provide annual cash-flow budget balance. Modifying the Auerbach-Kotlikoff (1987) dynamic general-equilibrium overlapping generations model to incorporate realistic patterns of fertility and mortality and shocks to productivity, fertility and mortality, we evaluate the effectiveness at the three public pension systems at spreading the effects of such shocks. We find that the systems, particularly those that rely to some extent on tax adjustments, are effective at spreading fertility and mortality shocks, but that this is not the case for productivity shocks, for which the pension systems actually tend to concentrate the economic impact. These results suggest that both system design and the source of shocks are important factors in determining the potential risk-spreading capacity of public pension arrangements.
Abstract: The existence of complementarity across management practices has been proposed as one potential explanation for the persistence of firm-level productivity differences. However, there are currently no conclusive population-level tests of the complementary joint adoption of management practices. Using unique detailed data on internal organization, occupational composition, and firm performance for a nationally representative sample of firms in the Canadian economy, we exploit regional variation in income tax progression as an instrument for the adoption of performance pay. We find systematic evidence for the complementarity of performance pay and decentralization of decision-making from principals to employees. Furthermore, in response to the adoption of performance pay, there is a concentration of decision-making at the level of managerial employees, as opposed to a general movement towards more decentralization in the organization. Finally, we find that adoption of performance pay is related to other types of organizational restructuring, such as greater use of outsourcing, Total Quality Management, re-engineering and a reduction in the number of layers in the hierarchy. Abstract: What determines firm growth over the life-cycle? Exploiting unique firm panel data on internal organization, balance sheets and innovation, representative of the entire Canadian economy, we study recent theories that generate life-cycle patterns for firm growth. These theories include organizational capital accumulation as well as management practices, financial frictions, learning about demand, and recent endogenous growth models with incumbent innovation. We emphasize the importance of differentiating between pure age effects of those theories and effects on size conditional on age. Our stylized facts highlight both empirical successes and shortcomings of current theory. First, models of organizational capital and innovation are broadly consistent with firm size correlations conditional on age but have difficulties matching the life-cycle dynamics of firm organization and innovation. Second, among theories we analyze, organizational capital and management practices are the most important determinants to explain intensive margin firm growth over the life-cycle. Third, although less important to explain intensive margin firm growth, financial frictions are an important determinant of firm exit, conditional on firm age.
with Mu-Jeung Yang and Bryan Hong, October 2014: under revision. [NBER Working Paper]
Abstract: Business strategy can be defined as a firm's plan to generate economic profits based on cost efficiency, superior quality or new products. The analysis of business strategy is at the intersection of market competition and a firm's efforts to secure persistently superior performance via investments in better management, organization or innovation. We empirically analyze the interaction of firms' business strategy and their managerial practices. To this end, we utilize a unique detailed dataset on business strategy, internal firm organization and performance, representative of the entire Canadian economy. Our empirical results show that measures of business strategy are strongly correlated with firm performance, both in the cross section and over time and even after controlling for unobserved profit shocks using intermediates usage. Furthermore, our analysis highlights that the fit between strategy and management is driven by the intersection of two key organizational trade-offs: first, employee initiative vs. coordination and second, exploration of novel business opportunities vs. exploitation of existing profit sources.