Salary cuts and competitiveness

There is a prevalent view outside Greece that promotion of competitiveness is tantamount with price reductions for Greek goods and services. Massive horizontal salary cuts appear, at first, to promote competitiveness by reducing unit labor costs and to reduce fiscal deficits by reducing the wage bill of the public sector. Upon closer look, however, horizontal salary cuts have been much greater than needed for Greek competitiveness, providing an alibi vis a vis the Troika for reforms that are still to be implemented, but at the same time undermining both competitiveness and the potential to reduce public debt through sustainable development

Credit card debt puzzles

Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve only the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) proposed an 'accountant-shopper' framework for the latter. The current paper builds, solves, and simulates a fully-specified accountant-shopper model, to show that this framework can actually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). The benchmark model is compared to setups without self-control problems, with alternative mechanisms, and with impatient but fully rational shoppers. Klassifikation: E210, G11

Stockholding: Recent Lessons from Theory and Computations

Household-level portfolio data show a tendency of the majority of households in each country to hold no stocks despite a historical expected-return premium on equity relative to riskless assets. This paper first explains why such a tendency constitutes a puzzle in economic theory (the "stockholding puzzle"). It discusses why simple popular notions regarding the source of non-participation (risk aversion, risky labor income, and borrowing constraints) are not confirmed by careful analysis of portfolio models and presents recent conclusions on what causes non-participation. Based on this, it revisits the popular view on non-participation and shows how it can be qualified to be consistent with lessons from economic theory. It also explains how this view can be extended to account for exits from the stock market and for limited diversification. Then, the paper describes three unsolved empirical puzzles concerning the share of stocks in portfolios of households that do participate in the stock market. It points to basic underlying mechanisms producing these theoretical results and discusses briefly possible future directions for research that may help resolve the puzzles. Finally, the paper draws lessons for practitioners interested in expanding the stockholder base.

Credit card debt puzzles

Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve only the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) proposed an 'accountant-shopper'framework for the latter. The current paper builds, solves, and simulates a fully-specified accountant-shopper model, to show that this framework can actually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). The benchmark model is compared to setups without self-control problems, with alternative mechanisms, and with impatient but fully rational shoppers.Credit cards, debt, self control, household portfolios

The Distribution of Gains from Access to Stocks

Recent market developments raise doubts regarding further spread of household stock market participation. We study, computationally and econometrically, net gains from access to stocks, and estimate the potentially changing role of their determinants across the distribution of such gains for US households. We highlight conflicting influences on net gains using a computational portfolio model, and use empirical estimates to derive differences in characteristics of potential entrants relative to marginal investors by the end of the dramatic recent expansion in the stockholder base. Findings suggest that downturns can have significant effects around the participation margin, through their influence on incomes, wealth, and employment. The role of education is found more limited than typically estimated, and confined to the low end of the gains distribution. Estimated characteristics of potential entrants relative to marginal stockholders suggest that further growth in participation poses considerable challenges, in view of more limited finances, younger age, more limited education and financial alertness, and above all significantly less self-declared willingness to assume financial risk by potential stockholders compared to marginal investors. The hurdle to financial practitioners interested in expanding the stockolder base is not estimated to be small.Portfolio choice, stock market participation, binary quantile regression

Credit cards: facts and theories

We use data from several waves of the Survey of Consumer Finances to document credit and debit card ownership and use across US demographic groups. We then present recent theoretical and empirical contributions to the study of credit and debit card behavior. Utilization rates of credit lines and portfolios of card holders present several puzzles. Credit line increases initiated by banks lead households to restore previous utilization rates. High-interest credit card debt co-exists with substantial holdings of low-interest liquid assets and with accumulation of retirement assets. Although available evidence disputes ignorance of credit card terms by card holders, redit card rates do not respond to competition. There is a rising trend in bankruptcy and delinquency, partly attributable to an increased tendency of households to declare bankruptcy associated with reduced social stigma, ease of procedures, and financial incentives. Co-existence of credit card debt with retirement assets can be explained through self-control hyperbolic discounting. Strategic default motives contribute partly to observed co-existence of credit card debt with low-interest liquid assets. A framework of “accountant-shopper” households, in which a rational accountant tries to control an impulsive shopper, seems consistent with both types of co-existence and with observed utilization of credit lines. JEL Classification: G11, E2

Borrowing Constraints, Portfolio Choice, and Precautionary Motives: Theoretical Predictions and Empirical Complications

This paper studies effects of two classes of borrowing constraints, collateral- and income-based, on wealth accumulation, portfolio behavior and on precautionary motives. We examine the sensitivity of solutions to tightness of constraints, education level, and preference parameters. The models are calibrated using the 1992 Survey of Consumer Finances. The idea that constrained households engage in less borrowing and less holding of risky assets than desired is borne out for income-based constraints but not necessarily for constraints where assets also serve as collateral. The commonly used nonnegativity constraint on wealth turns out to be a very special case among collateral constraints: not only is constrained consumption equal to income but precautionary wealth holding is zero. Income-based constraints reverse the sign of precautionary effects on holdings of risky assets, and so do relatively tight collateral constraints. The latter reverse the sign of precautionary effects on borrowing, as well. Precautionary effects on wealth holding and on borrowing are smaller when income-based constraints are binding, though not necessarily so for collateral constraints. Results suggest that inclusion of constrained households in a sample of unconstrained ones is quite likely when using standard wealth-level cutoffs for sample splitting, and that it tends to bias empirically observed precautionary effects on wealth downwards. Estimated precautionary effects on risky assets and on borrowing may even be biased towards zero. These findings may help explain the failure of recent empirical studies to uncover sizeable precautionary effects on wealth and on portfolio composition.Precautionary saving, borrowing constraints, household portfolios

Borrowing Constraints, Portfolio Choice, and Precautionary

This paper studies effects of two classes of borrowing constraints, collateral- and income-based, on wealth accumulation, portfolio behavior and on precautionary motives. We examine the sensitivity of solutions to tightness of constraints, education level, and preference parameters. The models are calibrated using the 1992 Survey of Consumer Finances. The idea that constrained households engage in less borrowing and less holding of risky assets than desired is borne out for income-based constraints but not necessarily for constraints where assets also serve as collateral. The commonly used nonnegativity constraint on wealth turns out to be a very special case among collateral constraints: not only is constrained consumption equal to income but precautionary wealth holding is zero. Income-based constraints reverse the sign of precautionary effects on holdings of risky assets, and so do relatively tight collateral constraints. The latter reverse the sign of precautionary effects on borrowing, as well. Precautionary effects on wealth holding and on borrowing are smaller when income-based constraints are binding, though not necessarily so for collateral constraints. Results suggest that inclusion of constrained households in a sample of unconstrained ones is quite likely when using standard wealth-level cutoffs for sample splitting, and that it tends to bias empirically observed precautionary effects on wealth downwards. Estimated precautionary effects on risky assets and on borrowing may even be biased towards zero. These findings may help explain the failure of recent empirical studies to uncover sizeable precautionary effects on wealth and on portfolio composition.Precautionary saving, borrowing constraints, household portfolios

Non-expected Utility, Saving, and Portfolios

Existing findings suggest that standard, frictionless, expected-utility models have difficulty accounting for average and for median holdings of wealth and of risky assets, partly as a result of the largely unexplained limited proportion of stockholders among households. We analyze life-cycle wealth accumulation and portfolio choice under career uncertainty and quantifiable departures from expected utility maximization. Our specification nests expected utility and three types of non-expected utility: (i) Kreps-Porteus preferences that disentangle risk aversion from elasticity of substitution, (ii) Yaari's Dual Theory of Choice, and (iii) Quiggin's Rank-dependent Utility. Specifications (ii) and (iii) exhibit "first-order" risk aversion and kinked indifference curves. Solution of such models under multiple sources of risk presents conceptual and computational difficulties. We introduce a notion of equilibrium and a computational algorithm appropriate for such setups. Computed wealth and stockholding, based on calibrated income processes for three education categories, are compared to the 1992 Survey of Consumer Finances. Rank-dependent utility enhances the importance of precautionary effects. Contrary to priors in the literature, solutions are not typically at kinks; neither kinks nor actual solutions involve zero stockholding when income risk is recognized; and yet predictions about average wealth and risky assets tend to improve for all education categories. Mere disentangling of risk aversion from elasticity has small effects, while dual theory predictions are farther from the data and the signs of precautionary effects are reversed.precautionary motives, non-expected utility, first-order risk aversion, portfolio choice, saving