Macroeconomic Effects of Bankruptcy & Foreclosure Policies

Bankruptcy laws govern consumer default on unsecured credit. Foreclosure laws regulate default on secured mortgage debt. I investigate to what extent differences in foreclosure and bankruptcy laws can jointly explain variation in default rates across states. I construct a general equilibrium model where heterogeneous infinitely-lived households have access to unsecured borrowing and can finance housing purchases with mortgages. Households can default separately on both types of debt. The model is calibrated to match national foreclosure and bankruptcy rates and aggregate statistics related to household net worth and debt. The model can account for 83% of the variation in bankruptcy rates due to differences in bankruptcy and foreclosure law. I find that more generous homestead exemptions raise the cost of unsecured borrowing. Households in states with high exemptions therefore hold less unsecured and more mortgage debt compared to low exemption states, which leads to lower bankruptcy rates but higher foreclosure rates. The model also predicts recourse results in higher bankruptcy rates and a higher coincidence of foreclosure and bankruptcy. I use the model to evaluate how proposed and implemented changes to bankruptcy policy affect default rates and welfare. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act yields large welfare gains (1% consumption equivalent variation) but results in increases in both foreclosure and bankruptcy rates. I find that implementing the optimal joint foreclosure and bankruptcy policy, which is characterized by no-recourse mortgages and a homestead exemption equal to one quarter of median income, yields modest welfare gains (0.3% consumption equivalent variation).Bankruptcy, Foreclosure, Housing, Default Risk, Household Debt

Pro-Cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model

We study the optimal provision of unemployment insurance (UI) over the business cycle. We consider an equilibrium Mortensen-Pissarides search and matching model with risk-averse workers and aggregate shocks to labor productivity. Both the vacancy creation decisions of firms and the search effort decisions of workers respond endogenously to aggregate shocks as well as to changes in UI policy. We characterize the optimal history-dependent UI policy. We find that, all else equal, the optimal benefit is decreasing in current productivity and decreasing in current unemployment. Optimal benefits are therefore lowest when current productivity is high and current unemployment is high. The optimal path of benefits reacts non-monotonically to a productivity shock. Following a drop in productivity, benefits initially rise in order to provide short-run relief to the unemployed and stabilize wages, but then fall significantly below their pre-recession level, in order to speed up the subsequent recovery. Under the optimal policy, the path of benefits is pro-cyclical overall. As compared to the existing US UI system, the optimal history-dependent benefits smooth cyclical fluctuations in unemployment and deliver non-negligible welfare gains.Unemployment Insurance, Business Cycles, Optimal Policy, Search and Matching

Pro-cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model

We study the optimal provision of unemployment insurance (UI) over the business cycle. We use an equilibrium search and matching model with aggregate shocks to labor productivity, incorporating risk-averse workers, endogenous worker search effort decisions, and unemployment benefit expiration. We characterize the optimal UI policy, allowing both the benefit level and benefit duration to depend on the history of past aggregate shocks. We find that the optimal benefit is decreasing in current productivity and decreasing in current unemployment. Following a drop in productivity, benefits initially rise in order to provide short-run relief to the unemployed and stabilize wages, but then fall significantly below their pre-recession level, in order to speed up the subsequent recovery. Under the optimal policy, the path of benefits is pro-cyclical overall. As compared to the existing US UI system, the optimal history-dependent benefits smooth cyclical fluctuations in unemployment and deliver substantial welfare gains.Unemployment Insurance, Business Cycles, Optimal Policy, Search and Matching

Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises

This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households.Housing, Mortgage Market, Default Risk, Government-Sponsored Enterprises

Case Study of Unemployment Insurance Reform in North Carolina

In July 1, 2013 unemployed workers in North Carolina lost access to all federally ?nanced unemployment bene?t extensions. In this document, the authors collect and describe available evidence on the performance of the labor market in North Carolina following this reform

Macroeconomic Implications of Consumer Default Policies, Mortgage Bailout Guarantees & Unemployment Insurance

In this dissertation, I examine the effects of three broad government interventions in the economy: 1) bankruptcy and foreclosure laws; 2) bailout guarantees in the mortgage market; and 3) unemployment insurance. In the first chapter, I develop a general-equilibrium model of housing and default to jointly analyze the effects of bankruptcy and foreclosure policies. Heterogeneous households have access to mortgages and unsecured credit and can default separately on both types of debt. I show that the interaction between foreclosure and bankruptcy decisions is crucial for explaining the observed cross-state correlation between default policies and default rates. I use the model to argue that a major recent reform to bankruptcy has unintended consequences: it substantially increases bankruptcy rates, despite being intended to reduce them, and also increases foreclosure rates. Nevertheless, the reform yields large welfare gains. In the second chapter, I ask what are the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (e.g., Fannie Mae)? A model with heterogeneous, infinitely-lived households and competitive housing and mortgage markets is constructed to evaluate this question. Households can default on their mortgages via foreclosure. The bailout guarantee is a tax-financed mortgage interest rate subsidy. Eliminating this subsidy leads to a large decline in mortgage origination and increases aggregate welfare by 0.5\% in consumption equivalent variation, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: it hurts low-income and low-asset households. Finally, I evaluate the positive and normative implications of unemployment benefits. In the third chapter, we exploit a policy discontinuity at U.S. state borders to identify the effects of unemployment insurance policies on unemployment. Our estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility. In contrast to the existing recent literature that mainly focused on estimating the effects of benefit duration on job search and acceptance strategies of the unemployed -- the micro effect -- we focus on measuring the general equilibrium macro effect that operates primarily through the response of job creation to unemployment benefit extensions. We find that it is the latter effect that is very important quantitatively. The last three recessions in the United States were followed by jobless recoveries: while labor productivity recovered, unemployment remained high. In the fourth chapter, we argue that countercyclical unemployment benefit extensions lead to jobless recoveries. We augment the standard Mortensen-Pissarides model to incorporate unemployment benefit expiration and state-dependent extensions of unemployment benefits. In the model, an extension of unemployment benefits raises the outside option of unemployed workers in wage bargaining, thereby reducing firm profits from hiring and slowing down the recovery of vacancy creation in the aftermath of a recession. We calibrate the model to US data and show that it is quantitatively consists with observed labor market dynamics, in particular the emergence of jobless recoveries after 1985. Furthermore, counterfactual experiments indicate that unemployment benefits are quantitatively important in explaining jobless recoveries. In the fifth chapter, we use an equilibrium search model with risk-averse workers to characterize the optimal cyclical behavior of unemployment insurance. Contrary to the current US policy, we find that the path of optimal unemployment benefits is pro-cyclical - positively correlated with productivity and employment. Furthermore, optimal unemployment benefits react non-monotonically to a productivity shock: in response to a fall in productivity, they rise on impact but then fall significantly below their pre-recession level. As compared to the current US unemployment insurance policy, the optimal state-contingent unemployment benefits smooth cyclical fluctuations in unemployment and deliver substantial welfare gains

Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises

This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households.

Competitive Advantage for Multiple-Memory Strategies in an Artificial Market

We consider a simple binary market model containing $N$ competitive agents. The novel feature of our model is that it incorporates the tendency shown by traders to look for patterns in past price movements over multiple time scales, i.e. {\em multiple memory-lengths}. In the regime where these memory-lengths are all small, the average winnings per agent exceed those obtained for either (1) a pure population where all agents have equal memory-length, or (2) a mixed population comprising sub-populations of equal-memory agents with each sub-population having a different memory-length. Agents who consistently play strategies of a given memory-length, are found to win more on average -- switching between strategies with different memory lengths incurs an effective penalty, while switching between strategies of equal memory does not. Agents employing short-memory strategies can outperform agents using long-memory strategies, even in the regime where an equal-memory system would have favored the use of long-memory strategies. Using the many-body `Crowd-Anticrowd' theory, we obtain analytic expressions which are in good agreement with the observed numerical results. In the context of financial markets, our results suggest that multiple-memory agents have a better chance of identifying price patterns of unknown length and hence will typically have higher winnings.Comment: Talk to be given at the SPIE conference on Econophysics and Finance, in the International Symposium 'Fluctuations and Noise', 23-26 May 2005 in Austin, Texa

Reducing the duration of unemployment benefits as arecession progresses can speed economic recovery

In the aftermath of the Great Recession, millions of Americans received extensions to their unemployment benefits – in some cases extending them to 99 weeks. At the end of 2013, these extended benefits expired, leading many to call on Congress to reauthorize their extension. But does extending unemployment benefits make sound economic sense? In new research, Stanislav Rabinovich and Kurt Mitman argue that the government was correct to rein in the duration of benefits. They write that reducing the duration of benefits helps the unemployed to find jobs faster, and leads to much less volatile unemployment

Characterization of PA-11 Flexible Liner Aging in the Laboratory and in Field Environments Throughout the World

Polyamide-11 (PA11) is a polymer of the Nylon family whose monomer is obtained from the castor bean, a renewable resource. It is widely used in offshore oil and gas production as a non-rigid flexible pipe liner, allowing for oil and gas transport from the wellhead to floating platforms for processing. The degradation of PA11 over time may lead to the pipe\u27s failure, with possibly catastrophic results which include loss of life. Until now, the characterization of the degredative process has been limited to laboratory studies of the effects of water and temperature on the rate and degree of hydrolysis. In this dissertation, a more exact model than those proposed in the literature thus far is defined and used to quantify the effects of temperature on the rate and degree of PA11 hydrolysis. This is performed using accelerated aging experiments in the lab which are evaluated by a primary means of molecular weight determination, size exclusion chromatography---multiple angle laser light scattering (SEC-MALLS). The effects of methanol and ethanol, used in the industry to control solid hydrate formation, are then characterized with respect to concentration and temperature, a topic which has not yet been addressed in the literature. Also novel to this work is the discovery of the effects of acetic acid, valeric acid, and 3-cyclopropionic acid on the rate and degree of PA11 hydrolysis. While these acids are present in the offshore oil and gas environment, acetic acid is the most common, and has been identified as a serious factor affecting degradation. The effects of acetic acid on rate and degree of hydrolysis are incorporated into the temperature dependence described above, and adapted to a model well suited for characterizing the degradation of PA11 in the changing temperature environments found in the field. By characterizing coupons removed from PA11 pipes in oil production fields in various parts of the world, the model is tested and used to predict aging of PA11 pipe. The model is shown to be effective at predicting degredation for times greater than ten years, which has never before been described. The effects of annealing coupled with decline in molecular weight on PA11 mechanical properties in accelerated aging experiments versus aging in the field environment is discussed. These contributions to understand and predict the aging of PA11 flexible pipes are central to increasing the safety of offshore oil and gas production, a topic that today is vastly important