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Session Overview
BH-8: Economics of Households
Friday, 25/Aug/2017:
1:30pm - 3:00pm

Session Chair: Daniel Dorn, Drexel University
Session Chair: Terrance Odean, UC Berkeley
Location: SN169

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Homeownership and the American Dream - An Analysis of Intergenerational Mobility Effects

Ulrike Malmendier1, Nirupama Kulkarni2

1UC Berkeley; 2Reserve Bank of India

Discussant: Samuli Knüpfer (BI Norwegian Business School)

Increasing homeownership has been a major policy goal for decades, especially in low-income areas. We argue that the positive correlation of homeownership and intergenerational mobility is highly place-dependent. First, we link commuting zone-level homeownership rates to intergenerational mobility, and find a strong positive relationship. The relationship persists after instrumenting for ownership using housing supply or price shocks. Second, we show that the positive relation between of homeownership and upward mobility is significantly diminished, or disappears, in areas with high segregation. Third, we find a similar relationship between homeownership and social capital - strongly positive but significantly diminished in high-segregation areas. Finally, we attempt to disentangle the externalities from the direct effects of homeownership and find that segregation of homeownership is a key factor in explaining the gap in intergenerational mobility of children of below median income families compared to the children of above median income families. Our findings suggest that parents' homeownership and, more generally, high homeownership rates may not benefit, or even disadvantage children in segregated, poor areas, possibly through reduced residential mobility.

EFA2017-1951-BH-8-Malmendier-Homeownership and the American Dream.pdf

Putting the Pension Back in 401(k) Plans: Optimal Versus Default Longevity Income Annuities

Vanya Horneff1, Raimond Maurer1, Olivia Mitchell2

1Goethe University Frankfurt; 2University of Pennsylvania

Discussant: Kim Peijnenburg (HEC Paris)

Most retirees take their payouts from the $5 trillion currently held in 401(k) pension plans as lump sums, yet since 2014, the US Treasury has encouraged firms to convert a portion of retirees’ plan balances into longevity income annuities paying lifetime benefits from age 85 onward. We evaluate the welfare implications of this reform using a realistically calibrated lifecycle consumption and portfolio choice model. We show that defaulting a fixed fraction of workers’ 401(k) assets over a dollar threshold is a cost-effective way to hedge longevity risk, enhancing welfare by up to 20% of retiree plan accruals.

EFA2017-579-BH-8-Horneff-Putting the Pension Back in 401.pdf

Financial Innovation and Stock Market Participation

Laurent Calvet1, Claire Celerier2, Paolo Sodini3, Boris Vallee4

1EDHEC; 2University of Toronto; 3Stockholm School of Economics; 4Harvard Business School

Discussant: Daniel Dorn (Drexel University)

While retail structured products have been shown to exploit household behavioral bias, the protection against losses they can offer might however alleviate household reluctance to invest in stock markets. We therefore explore whether these products have a positive impact on household stock market participation. Using a large administrative panel of Swedish households, we document the fast development of these innovative products, and how households investing in structured products differ from traditional stock market participants. Structured products investors rank high on proxies of of risk aversion. The micro-evidence in this paper suggests that the introduction of retail structured products impacts both the participation decision and its extent of these households. The effects are more pronounced for structured products whose design protects against losses.

EFA2017-1302-BH-8-Calvet-Financial Innovation and Stock Market Participation.pdf

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