Job Market Paper
In the US, half of all mortgage borrowers only consider one lender when refinancing. We investigate how statistical discrimination by lenders, a tool that separates borrowers who differ in search intensity, affects welfare and monetary policy transmission to consumption. We build and calibrate a general equilibrium model of the mortgage market with two types of borrowers who differ in the number of lenders they meet. Statistical discrimination based on the relative mass of the two types at any observable current mortgage rate and home equity level results in relatively higher offer rates for non-shoppers. Higher offer rates reduce the incentive to refinance. Repeated refinancing increases the separation between the two types, reinforcing the mechanism. Statistical discrimination carries a significant welfare cost ($3,300) for a borrower, accounting for two-thirds of the total difference in welfare between the two types. This welfare cost becomes two-thirds if non-shoppers search more, but quadruples if shoppers search more. Thus, the two ways to increase mortgage search, an explicit goal of the CFPB, have very different effects on welfare. Statistical discrimination halves non-shoppers’ consumption response to a monetary policy shock but does not increase shoppers’ response. Thus, it reduces aggregate response by a third. Hence, this subtle effect of mortgage search heterogeneity is highly relevant for policymaking.
Inaction, Search Costs and Market Power in the US Mortgage Market (with Kian Samaee) [draft coming soon]
Many US mortgage borrowers do not refinance despite seemingly having financial incentives to do so. We explore the role of search costs in explaining this inaction, focusing on the 2009-2015 period when mortgage rates significantly declined. We estimate a (dynamic) discrete choice model of refinancing and search decisions using a proprietary panel data set, which includes detailed information on mortgage contracts, borrower creditworthiness and search intensity (number of mortgage inquiries), and the sequence of refinancing decisions. We find that search costs significantly inhibit refinancing through two channels: While larger search costs directly increase the cost of refinancing, they also indirectly increase loan originators’ market power and raise the offered mortgage rates. We find that the indirect market power effect dominates. We apply our model to study an alternative market design, in which loan originators post interest rates based on credit qualities to a centralized market, and borrowers can lock in posted rates by choosing to refinance. We conclude, a centralized market for mortgage origination can significantly improve refinancing activity by eliminating market power, even if there will be no change in refinancing costs.
Effect of Coalition Governments on Public Investment [draft coming soon]
Based on a panel data of 80 countries, I find that during an election cycle, public investment is a concave function of the months to election. Also, the post-election increase in public investment is smaller if the share of the coalition partners in the government is higher and that a government perceived to be corrupt does less public investment. I write a model of coalition governments where parties in government divert a fraction of the imperfectly observed public investment for private benefit and the smaller party in government can call an early election hoping to become the bigger party post-election. This model adds endogenous early elections to models of political competition. Coalition governments invest less to signal honesty and thus avoid an early election. Strong governments invest less as election approaches to signal honesty whereas weak governments invest more as election approaches as the incentive of smaller party to call an early election reduces as the scheduled election is nearer; thus public investment is concave during an election cycle. For optimal growth-inducing public investment, winner-takes-all systems are better than proportional systems to reduce these distortions.
(pre-PhD) “An Architecture for regulatory compliant database management”, Proceedings of the 2009 IEEE International Conference on Data Engineering, IEEE Computer Society, 2009. (with Soumyadeb Mitra, Marianne Winslett, Richard T. Snodgrass and Shashank Yaduvanshi)