Physician Income Prediction Errors: Sources and Implications for Behavior

Although income expectations play a central role in many economic decisions, little is known about the sources of income prediction errors and how agents respond to income shocks. This paper uses a unique panel data set to examine the accuracy of physicians' income expectations, the sources of income prediction errors, and the effect of income prediction errors on physician behavior. The data set contains direct survey measures of income expectations for medical students who graduated between 1970 and 1998, their corresponding income realizations, and a rich summary of the shocks hitting their medical practices. We find that income prediction errors were positive on average over the sample period, but varied significantly over time and cross-sectionally. We trace these results to persistent specialty-specific shocks, such as the growth of health maintenance organizations (HMOs) and other changes across health care markets. Physicians who experienced negative income shocks were more likely to respond by increasing their hours worked, allocating fewer of their work hours to teaching/research and more to patient care, and were more likely to switch specialties.

Net Worth and Housing Equity in Retirement

This paper documents the trends in the life-cycle profiles of net worth and housing equity between 1983 and 2004. The net worth of older households significantly increased during the housing boom of recent years. However, net worth grew by more than housing equity, in part because other assets also appreciated at the same time. Moreover, the younger elderly offset rising house prices by increasing their housing debt, and used some of the proceeds to invest in other assets. We also consider how much of their housing equity older households can actually tap, using reverse mortgages. This fraction is lower at younger ages, such that young retirees can consume less than half of their housing equity. These results imply that 'consumable' net worth is smaller than standard calculations of net worth.

Physician Income Expectations and Specialty Choice

In spite of the important role of income expectations in economics, economists know little about how people actually form these expectations. We use a unique data set that contains the explicit income expectations of medical students over a 25-year time period to examine how students form income expectations. We examine whether students condition their expectations on their own ability, contemporaneous physician income, and the ex post income of physicians in their medical school cohort. We then test whether a model that uses the students' explicit income expectations to predict their specialty choices has a better fit than a model that assumes income expectations are formed statically, and a model that bases income expectations on ex post income.

Owner-Occupied Housing as a Hedge Against Rent Risk

Many people assume that the most significant risk in the housing market is that homeowners are exposed to fluctuations in house values. However, homeownership also provides a hedge against fluctuations in future rent payments. This paper finds that, even though house price risk endogenously increases with rent risk, the latter empirically dominates for most households so housing market risk actually increases homeownership rates and house prices. Further, the net effect of rent risk on the demand for homeownership increases with a household's expected length of stay in its home, as the cumulative rent volatility rises and the discounted house price risk falls. Using CPS data, the difference in the probability of homeownership between households with long and short expected lengths of stay is 2.9 to 5.4 percentage points greater in high rent variance places than low rent variance places. The sensitivity to rent risk is greatest for households that devote a larger share of their budgets to housing, and thus face a bigger gamble. Similarly, the elderly who live in high rent variance places are more likely to own their own homes, and their probability of homeownership falls faster with age (as their horizon shortens). This aversion to rent risk might help explain why older households do not consume much of their housing wealth. Finally, we find that house prices capitalize not only expected future rents, but also the associated rent risk premia. At the MSA level, a one standard deviation increase in rent variance increases the house price-to-rent ratio by 2 to 4 percent.

Special purpose vehicles and securitization

This paper analyzes securitization and more generally “special purpose vehicles” (SPVs), which are now pervasive in corporate finance. The first part of the paper provides an overview of the institutional features of SPVs and securitization. The second part provides a model to analyze the motivations for using SPVs and the conditions under which SPVs are sustainable. The authors argue that a key source of value to using SPVs is that they help reduce bankruptcy costs. Off-balance sheet financing involves transferring assets to SPVs, which reduces the amount of assets that are subject to bankruptcy costs, since SPVs are carefully designed to avoid bankruptcy. Off-balance sheet financing is most advantageous for sponsoring firms that are risky or face large bankruptcy costs. SPVs become sustainable in a repeated SPV game, because firms can implicitly “commit” to subsidize or “bail out” their SPVs when the SPV would otherwise not honor its debt commitments, despite legal and accounting restrictions to the contrary. The third part of the paper tests two key implications of the model using unique data on credit card securitizations. First, riskier firms should securitize more, ceteris paribus. Second, since investors know that SPV sponsors can bail out their SPVs if there is a need, in pricing the debt of the SPV investors will care about the risk of the sponsor defaulting, above and beyond the risk of the SPVs assets. The authors find evidence consistent with these implications. ; Also issued as Payment Cards Center Discussion Paper No. 05-13Asset-backed financing

Owner-occupied housing as a hedge against rent risk

The conventional wisdom that homeownership is very risky ignores the fact that the alternative, renting, is also risky. Owning a house provides a hedge against fluctuations in housing costs, but in turn introduces asset price risk. In a simple model of tenure choice with endogenous house prices, the authors show that the net risk of owning declines with a household’s expected horizon in its house and with the correlation in housing costs in future locations. Empirically, they find that both house prices, relative to rents, and the probability of homeownership increase with net rent riskHousing ; Housing - Prices

A Portfolio View of Consumer Credit

To compute risk-adjusted returns and gauge the volatility of their portfolios, lenders need to know the covariances of their loans' returns with aggregate returns. Cross-sectional differences in these covariances also provide insight into the nature of the shocks hitting different types of consumers. We use a unique panel dataset of credit bureau records to measure the 'covariance risk' of individual consumers, i.e., the covariance of their default risk with aggregate consumer default rates, and more generally to analyze the cross-sectional distribution of credit, including the effects of credit scores. We obtain two key sets of results. First, there is significant systematic heterogeneity in covariance risk across consumers with different characteristics. Consumers with high covariance risk tend to also have low credit scores (high default probabilities). Second, the amount of credit obtained by consumers significantly increases with their credit scores, and significantly decreases with their covariance risk (especially revolving credit), though the effect of covariance risk is smaller in magnitude.

An Empirical Analysis of Personal Bankruptcy and Delinquency

This paper uses a unique new panel data set of credit card accounts to analyze credit card delinquency and more generally personal bankruptcy and the stability of credit risk models. We estimate duration models for default and assess the relative importance of different variables in predicting default. We investigate how the propensity to default has changed over time, disentangling the two leading explanations for the recent increase in default rates – a deterioration in the risk-composition of borrowers versus a reduction in the social stigma of default. Even after controlling for risk-composition and other economic fundamentals, the propensity to default significantly increased between 1995 and 1997. By contrast, increases in credit limits and other changes in risk-composition explain only a small part of the change in default rates. Standard default models appear to have missed an important time-varying default factor, consistent with the stigma effect.Personal bankruptcy; Forecasting default; Credit risk management; Consumer credit; Credit cards

Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data

This paper utilizes a unique new dataset of credit card accounts to analyze how people respond to changes in credit supply. The data consist of a panel of thousands of individual credit card accounts from several different card issuers, with associated credit bureau data. We estimate both marginal propensities to consume (MPCs) out of liquidity and interest-rate elasticities. We also evaluate the ability of different models of consumption to rationalize our results, distinguishing the Permanent-Income Hypothesis (PIH), liquidity constraints, precautionary saving, and behavioral models. We find that increases in credit limits generate an immediate and significant rise in debt, counter to the PIH. The average 'MPC out of liquidity' (dDebt/dLimit) ranges between 10%-14%. The MPC is much larger for people starting near their limits, consistent with binding liquidity constraints. However, the MPC is significant even for people starting well below their limit. We show this response is consistent with buffer-stock models of precautionary saving. Nonetheless there are other results that conventional models cannot easily explain, e.g. why so many people are borrowing on their credit cards, and simultaneously holding low yielding assets. Unlike most other studies, we also find strong effects from changes in account-specific interest rates. The long-run elasticity of debt to the interest rate is approximately -1.3. Less than half of this elasticity represents balance-shifting across cards, with most reflecting net changes in total borrowing. The elasticity is larger for decreases in interest rates than for increases, which can explain the widespread use of temporary promotional rates. The elasticity is smaller for people starting near their credit limits, again consistent with liquidity constraints.