Essays in Macroeconomics and Household Finance
Experience-based Learning, Stock Market Participation and Portfolio Choice Recent evidence suggests that lifetime experiences play an important role in determining households' investment choices. I incorporate these findings and the fact that household portfolios are underdiversified into an otherwise standard life-cycle model and examine to what extent they can help resolve long-standing puzzles in the literature regarding stock market participation and the fraction of financial wealth invested in risky assets. I show that experience-based learning about returns creates a positive correlation between a household's position in the wealth distribution and its optimism about future returns. The wealthy consequently increase their investment in risky assets, while participation is limited among poor households. I find that in a reasonably calibrated quantitative model, this mechanism is able to close approximately half of the gap between the participation rates observed in the data and the predictions from standard models. Health Dynamics and Heterogeneous Life Expectancies In this paper, we provide improved estimates for age-dependent health transitions and survival probabilities for different subsamples of the US population. The estimated yearly transition matrices can be used in any life-cycle model where health and survival dynamics are of interest. The results show substantial heterogeneity in life expectancy in the population. For a 70-year-old man in excellent health, the probability of reaching his 80th birthday is around 75%, while the corresponding probability for a man in poor health is just below 40%. Subjective Life Expectancies, Time Preference Heterogeneity and Wealth Inequality Time preference heterogeneity is one of the potential sources of wealth inequality, but preferences are difficult to measure and quantify. In this paper, we investigate one source of time preference heterogeneity: heterogeneity in life expectancy. We document a systematic bias in subjective survival beliefs within cohorts that exacerbates the heterogeneity found in the population: individuals with a low survival probability relative to their peers underestimate their life expectancies, while individuals with a high survival probability overestimate theirs. We introduce survival heterogeneity into an otherwise standard overlapping-generations model and let survival probabilities and beliefs evolve stochastically according to a health and death process estimated from micro data. We find strong effects of life expectancy heterogeneity on within-cohort wealth inequality, but small effects on economy-wide wealth inequality. On the Redistributive Effects of Government Bailouts in the Mortgage Market In this paper we study the aggregate and distributional consequences of government bailout guarantees in the US mortgage market. We construct a model with aggregate risk in which competitive financial intermediaries issue mortgages to households that can default on their debt. Default probabilities are priced into mortgage interest rates unless a government bailout guarantee makes the lenders whole even in economic downturns in which foreclosure rates surge. We use the model to assess the extent to which bailout guarantees lead to excessive mortgage lending, household leverage and foreclosures in episodes of housing crises, as well as excess volatility in house prices in severe recessions.
