Transaction costs and consumption
The Rational Expectations Permanent Income Hypothesis (RE-PIH) fails to explain several features of consumption behavior documented by previous researchers. First, the marginal propensity to consume (MPC) out of unanticipated income shocks tends to decrease as the size of the shocks becomes larger. Second, the MPC out of small income shocks is well above what the RE-PIH predicts. Third, consumption responds to small anticipated income changes, but not to large ones. This paper argues that these findings can be reconciled within a RE-PIH framework that includes a cash-in-advance constraint. In ...
Credit Scores and Committed Relationships
This paper presents novel evidence on the role of credit scores in the dynamics of committed relationships. We document substantial positive assortative matching with respect to credit scores, even when controlling for other socioeconomic and demographic characteristics. As a result, individual-level differences in access to credit are largely preserved at the household level. Moreover, we find that the couples' average level of and the match quality in credit scores, measured at the time of relationship formation, are highly predictive of subsequent separations. This result arises, in part, ...
Information, Contract Design, and Unsecured Credit Supply: Evidence from Credit Card Mailings
How do lenders of unsecured credit use screening and contract design to mitigate the risks of information asymmetry and limited commitment in the absence of collateral? To address this question, we take advantage of a unique dataset of over 200,000 credit card mail solicitations to a representative sample of households over the recent credit cycle--a period that includes the implementation of the CARD Act. We find that while lenders use credit scores as a prominent screening device, they also take into account a wide array of other information on borrowers' credit histories and financial and ...
Developments in the Credit Score Distribution over 2020
The distribution of household credit risk can vary with aggregate economic and credit conditions. For example, the share of subprime-scored borrowers declined at a relatively steady pace during the economic recovery from the Global Financial Crisis. Although the COVID-19 pandemic interrupted the economic conditions that supported this trend, the pace of decline accelerated following the pandemic’s onset in March 2020. The analysis that follows suggests that this acceleration was largely driven by the Coronavirus Aid, Relief, and Economic Security Act’s (CARES Act) forbearance provisions.
Do People Leave Money on the Table? Evidence from Joint Mortgage Applications and the Minimum FICO Rule
There is mounting evidence that households make suboptimal savings and investment decisions. this note presents novel evidence that many mortgage borrowers appear to have failed to apply for mortgages that give the lowest interest rates.
The Young and the Carless? The Demographics of New Vehicle Purchases
A number of recent studies and press articles have documented a dramatic decline in young adults' willingness to own vehicles, particularly in the years since the 2007-09 recession.
Who Drives Luxury Cars (Only for a While)?
Household consumption of luxury goods has attracted increasing attention in various areas of finance and economics research.
Are Income and Credit Scores Highly Correlated?
To the best of our knowledge, statistical analysis on the relationship between income and credit scores using proper data remains scant. Using a unique proprietary data set, this note attempts to fill the gap in our understanding of this relationship.
Is Underemployment Underestimated? Evidence from Panel Data
Despite a broad recovery of the U.S. economy from the depths of the Great Recession, lingering slack remains in the labor market.
Your Friends, Your Credit: Social Capital Measures Derived from Social Media and the Credit Market
Chetty et al. (2022a) introduced an array of social capital measures derived from Facebook friendships and found that one of these indicators, economic connectedness (EC), predicted upward income mobility well. Bricker and Li (2017) proposed the average credit score of a community's residents as an indicator of local social trust. We show in this paper that the average credit scores are robustly correlated with EC, negatively correlated with the friending-bias measure introduced in Chetty et al. (2022b), and predict economic mobility to a comparable extent after controlling for EC. The ...