Social Security and Unsecured Debt

Most young households simultaneously hold both unsecured debt on which they pay an average of 10 percent interest and social security wealth on which they earn less than 2 percent. We document this fact using data from the Panel Study of Income Dynamics. We then consider a life-cycle model with optimizing and rule-of-thumb' households and explore ways to reduce this inefficiency. We show that both allowing households to use social security wealth to pay off debt and exempting young households from social security contributions (but in both cases requiring higher contributions later later in life) leads to increases in welfare for both types of households and significant increases in consumption and saving, and reductions in debt, for optimizing households.

Collateralized Borrowing and Life-Cycle Portfolio Choice

We examine the effects of collateralized borrowing in a realistically parameterized life-cycle portfolio choice problem. We provide basic intuition in a two-period model and then solve a multi-period model computationally. Our analysis provides insights into life-cycle portfolio choice relevant for researchers in macroeconomics and finance. In particular, we show that standard models with unlimited borrowing at the riskless rate dramatically overstate the gains to holding equity when compared with collateral-constrained models. Our results do not depend on the specification of the collateralized borrowing regime: the gains to trading equity remain relatively small even with the unrealistic assumption of unlimited leverage. We argue that our results strengthen the role of borrowing constraints in explaining the portfolio participation puzzle, that is, why most investors do not own stock.

Occupation-Level Income Shocks and Asset Returns: Their Covariance and Implications for Portfolio Choice

This paper develops and applies a simple graphical approach to portfolio selection that accounts for covariance between asset returns and an investor's labor income. Our graphical approach easily handles income shocks that are partly hedgable, multiple risky assets, many periods and life cycle considerations. We apply the approach to occupation-level components of individual income innovations estimated from repeated cross sections of the Current Population Survey. We characterize several properties of these innovations, including their covariance with aggregate equity returns, long-term bond returns and returns on several other assets. Aggregate equity returns are uncorrelated with the occupation-level income innovations, but a portfolio formed on firm size is significantly correlated with income innovations for several occupations, and so are selected industry-level equity portfolios. An application of the theory to the empirical results shows (a) large predicted levels of risky asset holdings compared to observed levels, (b) considerable variation in optimal portfolio allocations over the life cycle, and (c) large departures from the two-fund separation principle.

Educational Opportunity and Income Inequality

Affordable higher education is, and has been, a key element of social policy in the United States with broad bipartisan support. Financial aid has substantially increased the number of people who complete university - generally thought to be a good thing. We show, however, that making education more affordable can increase income inequality. The mechanism that drives our results is a combination of credit constraints and the `signaling' role of education first explored by Spence (1973). When borrowing for education is difficult, lack of a college education could mean that one is either of low ability or of high ability but with low financial resources. When government programs make borrowing or lower tuition more affordable, high-ability persons become educated and leave the uneducated pool, driving down the wage for unskilled workers and raising the skill premium.

Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market

The U.S. mortgage market has experienced phenomenal change over the last 35 years. Most observers believe that the deregulation of the banking industry and financial markets generally has played an important part in this transformation. This paper develops and implements a technique for assessing the impact of changes in the mortgage market on individuals and households. Our analysis is based on an implication of the permanent income hypothesis: that the higher a household’s future income, the more it desires to spend and consume, ceteris paribus. If we have perfect credit markets, then desired consumption matches actual consumption and current spending on housing should forecast future income. Since credit market imperfections mute this effect, we can view the strength of the relationship between housing spending and future income as a measure of the “imperfectness” of mortgage markets. Thus, a natural way to determine whether mortgage market developments have actually helped households by decreasing market imperfections is to see whether this link has strengthened over time. We implement this framework using panel data going back to 1969. We find that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects. One issue that has received particular attention is the role that the housing Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, have played in improving the market for housing finance. We find no evidence that the GSEs’ activities have contributed to this phenomenon. This is true whether we look at all homebuyers, or at subsamples of the population whom we might expect to benefit particularly from GSE activity, such as lowincome households and first-time homebuyers.

Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market

The U.S. mortgage market has experienced phenomenal change over the last 35 years. This paper develops and implements a technique for assessing the impact of changes in the mortgage market on households. Our framework, which is based on the permanent income hypothesis, that allows us to gauge the importance of borrowing constraints by estimating the empirical relationship between the value of a household's home purchase and its future income. We find that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects. One issue that has received particular attention is the role that the housing Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, have played in improving the market for housing finance. We find no evidence that the GSEs' activities have contributed to this phenomenon. This is true whether we look at all homebuyers, or at subsamples of the population whom we might expect to benefit particularly from GSE activity, such as low-income households and first-time homebuyers.

Why don't lenders renegotiate more home mortgages? redefaults, self-cures, and securitization

We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment-reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securitization: Servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and in subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors.

The interplay of intrinsic and extrinsic parameters on the dynamic behaviour of a microbial food web

Kurzzusammenfassung Organismen interagieren innerhalb und zwischen den verschiedenen trophischen Ebenen, beispielsweise durch Konkurrenz oder durch Räuber-Beutebeziehungen. Daraus ergibt sich ein dynamisches Verhalten, welches eine entscheidende Rolle in der Koexistenz der Arten und für das Funktionieren eines Ökosystems spielt. Die Analyse der Populationsdynamiken innerhalb eines Ökosystems ist sehr komplex, weil sich extrinsische (biotische und abiotische Faktoren) und intrinsische (dichteabhängige) Dynamiken überlagern. In der vorliegenden Arbeit geht es darum, die verschiedenen Faktoren im Einzelnen zu analysieren und deren Bedeutung für die Interaktionen des gesamten Systems abzuschätzen. Im Vorfeld wurden entsprechende mathematische Modelluntersuchungen durchgeführt, die Arbeitshypothesen für die experimentellen Arbeiten lieferten. Um extrinsische und intrinsische Dynamiken systematisch untersuchen zu können, wurden Experimente im Labor durchgeführt. Als Modellsystem wurde ein vereinfachtes aquatisches mikrobielles Nahrungsnetz untersucht bestehend aus zwei unterschiedlichen Bakterien-Stämmen (Acinetobacter johnsonii und Pedobacter sp.) und einem räuberischen Ciliaten (Tetrahymena pyriformis). Innerhalb dieser Arbeit ist es gelungen, den experimentellen Aufbau für Chemostate, die unter sehr konstanten Bedingungen analysiert werden sollen, zu optimieren. Ungewollte externe Schwankungen, wie beispielsweise in der Durchflussrate, bei der Probennahme und in den Temperaturbedingungen konnten auf ein absolutes Minimum reduziert werden. Mit diesem experimentellen Aufbau konnte gezeigt werden, dass die intrinsischen, dichteabhängigen Populationsdynamiken ohne externe Einflüsse bereits sehr komplex sind und auf ein chaotisches Verhalten schließen lassen. Erstmalig haben Modelluntersuchungen und entsprechende Experimente im Labor gezeigt, dass induzierbare Fraßschutzmechanismen maßgeblich dazu beitragen können, dass der Bereich der Koexistenz der drei Arten sich erweitert, wenn die Durchflussrate als extrinsischer Parameter, welcher einen Einfluss auf die Wachstumsrate der einzelnen Organismen hat, verändert wird. Schwankungen in der Temperatur sind in nahezu allen Ökosystemen weit verbreitet. Diese reichen von kurzzeitigen, täglichen Fluktuationen bis hin zu jahreszeitlichen Temperatureffekten. Wenn man eine globale Erderwärmung in Betracht zieht, bekommt die Analyse des Temperatureinflusses eine noch größere Bedeutung. Innerhalb dieser Arbeit wurden zum ersten Mal Analysen mit der Wirkung von extrinsischen, chaotischen Temperaturschwankungen auf das dynamische Verhalten eines mikrobiellen Nahrungsnetzes durchgeführt. Die Ergebnisse lieferten Hinweise darauf, dass intrinsisch bedingtes chaotisches Verhalten durch chaotische Temperaturschwankungen beeinflusst werden kann. Das untersuchte mikrobielle Nahrungsnetz ist charakterisiert durch Räuber-Beute Dynamiken, Fraßschutzmechanismen und Konkurrenz. Die Betrachtung dieser Faktoren im Einzelnen und im Zusammenspiel zeigte, dass aperiodische Populationsdynamiken in dem vereinfachten Modellsystem dominierten, auch wenn die externen Parameter, wie Temperatur und Durchflussrate verändert wurden. Diese grundsätzliche dynamische Eigenschaft hat vermutlich einen größeren Einfluss in der Natur auf die verschiedenen Glieder eines Ökosystems als bisher angenommen