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Working Paper
Does inequality cause financial distress? Evidence from lottery winners and neighboring bankruptcies
Agarwal, Sumit; Scholnick, Barry; Mikhed, Vyacheslav (2016-02-11)
Revised Oct 2016. We test the hypothesis that income inequality causes financial distress. To identify the effect of income inequality, we examine lottery prizes of random dollar magnitudes in the context of very small neighborhoods (13 households on average). We find that a C$1,000 increase in the lottery prize causes a 2.4% rise in subsequent bankruptcies among the winners? close neighbors. We also provide evidence of conspicuous consumption as a mechanism for this causal relationship. The size of lottery prizes increases the value of visible assets (houses, cars, motorcycles), but not ...
Working Papers , Paper 16-4

Journal Article
Determinants of automobile loan default and prepayment
Agarwal, Sumit; Chomsisengphet, Souphala; Ambrose, Brent W. (2008-07)
The authors examine whether a borrower?s choice of automobile reveals information about future loan performance. They find that loans on most luxury automobiles have a higher probability of prepayment, while loans on most economy automobiles have a lower probability of default, even when holding traditional risk factors, such as income and credit score, constant.
Economic Perspectives , Volume 32 , Issue Q III

Working Paper
Market-based loss mitigation practices for troubled mortgages following the financial crisis
Agarwal, Sumit; Ben-David, Itzhak; Chomsisengphet, Souphala; Evanoff, Douglas D.; Amromin, Gene (2011)
The meltdown in residential real-estate prices that commenced in 2006 resulted in unprecedented mortgage delinquency rates. Until mid-2009, lenders and servicers pursued their own individual loss mitigation practices without being significantly influenced by government intervention. Using a unique dataset that precisely identifies loss mitigation actions, we study these methods?liquidation, repayment plans, loan modification, and refinancing?and analyze their effectiveness. We show that the majority of delinquent mortgages do not enter any loss mitigation program or become a part of ...
Working Paper Series , Paper WP-2011-03

Working Paper
Perverse incentives at the banks? Evidence from a natural experiment
Agarwal, Sumit; Wang, Faye H. (2009)
Incentive provision is a central question in modern economic theory. During the run up to the financial crisis, many banks attempted to encourage loan underwriting by giving out incentive packages to loan officers. Using a unique data set on small business loan officer compensation from a major commercial bank, we test the model?s predictions that incentive compensation increases loan origination, but may induce the loan officers to book more risky loans. We find that the incentive package amounts to a 47% increase in loan approval rate, and a 24% increase in default rate. Overall, we find ...
Working Paper Series , Paper WP-09-08

Working Paper
Why do borrowers make mortgage refinancing mistakes?
Rosen, Richard J.; Agarwal, Sumit; Yao, Vincent W. (2013)
Refinancing a mortgage is often one of the biggest and most important financial decisions that people make. Borrowers need to choose the interest rate differential at which to refinance and, when that differential is reached, they need to take the steps to refinance before rates change again. The optimal differential is where the interest saved by refinancing equals the sum of refinancing costs and the option value of refinancing. Using a unique panel data set, we find that approximately 59% of borrowers refinance sub-optimally ? with 52% of the sample making errors of commission (choosing ...
Working Paper Series , Paper WP-2013-02

Working Paper
Modeling to Inform Economy-Wide Pandemic Policy: Bringing Epidemiologists and Economists Together
Darden, Michael; Dowdy, David; Gardner, Lauren; Hamilton, Barton; Kopecky, Karen A.; Marx, Melissa; Papageorge, Nicholas; Polsky, Daniel; Powers, Kimberly; Stuart, Elizabeth; Zahn, Matthew; Agarwal, Sumit (2021-11-16)
Facing unprecedented uncertainty and drastic trade-offs between public health and other forms of human well-being, policymakers during the Covid-19 pandemic have sought the guidance of epidemiologists and economists. Unfortunately, while both groups of scientists use many of the same basic mathematical tools, the models they develop to inform policy tend to rely on different sets of assumptions and, thus, often lead to different policy conclusions. This divergence in policy recommendations can lead to uncertainty and confusion, opening the door to disinformation, distrust of institutions, and ...
FRB Atlanta Working Paper , Paper 2021-26

Working Paper
The age of reason: financial decisions over the lifecycle
Agarwal, Sumit; Gabaix, Xavier; Laibson, David I.; Driscoll, John C. (2007)
The sophistication of financial decisions varies with age: middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults. We document this pattern in ten financial markets. The measured effects cannot be explained by observed risk characteristics. The sophistication of financial choices peaks around age 53 in our cross-sectional data. Our results are consistent with the hypothesis that financial sophistication rises and then falls with age, although the patterns that we observe represent a mix of age effects and cohort effects.
Working Paper Series , Paper WP-07-05

Working Paper
Does it pay to read your junk mail? evidence of the effect of advertising on home equity credit choices
Agarwal, Sumit; Ambrose, Brent W. (2008)
We examine the effect of direct mail (commonly referred to as junk mail) advertising on individual financial decisions by studying consumer choice of home equity debt contracts. Consistent with the theoretical predictions, we find that financial variables underlying the relative pricing of debt contracts are the leading factors explaining consumers home equity debt choice. Furthermore, we also find that the intended use of debt proceeds significantly impacts consumer choice. However, when we study a subset of consumers who received a direct mail solicitation for a particular debt contract ...
Working Paper Series , Paper WP-08-09

Working Paper
The consumption response to minimum wage increases
Agarwal, Sumit; French, Eric; Aaronson, Daniel (2008)
This paper presents evidence that spending increases more than income, and thus debt rises, in households with minimum wage workers following a minimum wage hike. Furthermore, we show that the size, timing, persistence, and composition of spending is inconsistent with the basic certainty equivalent life cycle model. However, our findings are consistent with a model where households can borrow against part of the value of their durable goods. ; Preliminary and incomplete.
Working Paper Series , Paper WP-07-23

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