Search

Low- and moderate-income households often struggle to save, but the annual tax refund represents a prime opportunity for these households to save toward their financial goals or build their emergency savings. This paper presents the results of a randomized, controlled experiment embedded in a free tax-preparation product offered in 2013 to low- and moderate-income households. The experiment involved approximately 470,000 filers and assessed the impact of behavioral interventions on their savings behaviors. The results show that filers exposed to the treatments, which involved the established behavioral-economics techniques of anchoring, choice architecture, and persuasive messaging, were more likely than a control group to save their tax refund and, on average, saved more of the refund. A follow-up survey of these tax filers found that the treatments were associated with saving more of the tax refund six months after filing. The findings also show that anchors encouraging filers to deposit certain amounts are more effective than persuasive messaging emphasizing savings., In low- and moderate-income (LMI) households, tax time can represent a significant, positive financial event. Large income-tax refunds, often bolstered by refundable credits such as the Earned Income Tax Credit [...]

One potential consequence of rising top-income concentration is borrowing by less-affluent households attempting to maintain relative living standards. This paper evaluates the 'keeping up with the Joneses 'phenomenon, examining the responsiveness of payment-to-income ratios for different debt types across the income distribution to changes in income among affluent households. The analysis provides evidence for the responsiveness of debt to rising top incomes. Middle- and upper-middle-income households take on more housing-related debt and have higher payments in places with higher top-income levels. Among lower-income households non-mortgage borrowing and debt payments decline, consistent with restrictions in the supply of credit. (JEL D63, D14), I. INTRODUCTION Rising levels of income inequality have long been recognized by researchers in the United States and other wealthy countries (Morelli, Smeeding, and Thompson 2015). High-level policymakers are increasingly [...]

. Multiplicative growth processes that are subject to random shocks often have an asymmetric distribution of outcomes. In a series of incentivized laboratory experiments, we show that a large majority of participants either strongly underestimate the asymmetry or ignore it completely. Participants misperceive the spread of the outcome distribution to be too narrowband, and they estimate the median and the mode to lie too close to the center of the distribution, failing to account for the compound nature of average growth. The observed biases are measured irrespective to risk preferences and they appear under a variety of conditions. The biases are largely consistent with a behavioral model in which geometric growth is confused with linear growth. This confusion is a possible driver of investors' difficulties with real-world financial products like leveraged exchange-traded funds and retirement savings plans. History: Accepted by Teck-Hua Ho, behavioral economics. Funding: Financial support by the European Research Council [Starting Grant 263412] is gratefully acknowledged. Supplemental Material: Data and the online appendix are available at https://doi.org/10.1287/ mnsc.2016.2618. Keywords: behavioral economics * multiplicative compounding * skewness neglect * exponential growth bias, 1. Introduction Many household investors face a particular mismatch in the time frames of asset return evaluations. They acquire their most important financial assets with the intention to liquidate them [...]

Due to the financial crisis, an increasing number of households face financial problems. This may lead to an increasing need for monitoring spending and budgets. We demonstrate that both cash [...]

Households age 60 and older bear increasing responsibility for managing retirement portfolios, and they hold the majority of financial assets in the United States. Cognitive aging studies find evidence of a decline in fluid and crystallized intelligence in old age that may impact the ability to manage money effectively. Using a large sample of older respondents, we test whether knowledge of basic concepts essential to effective financial choice declines after age 60. We find a consistent linear decline in financial literacy score after age 60. A nearly identical rate of decline among men, stockowners, older, and collegeeducated respondents indicates that cohort effects are not driving the results. Confidence in financial decision-making abilities does not decline with age. A separate analysis using data that include measures of cognitive ability suggests that a natural decline in both fluid and crystallized intelligence in old age contributes to falling financial literacy scores. History: Accepted by Brad Barber, finance. Keywords: financial literacy * cognitive ability * household finance * aging * retirement, 1. Introduction Households age 60 and over hold 51% of all financial wealth in the United States. (1) Day (2010) predicts that the proportion of U.S. households over the age [...]

This study examines the correlation between resource protection and the intrahousehold distribution of bargaining power. Using data from the Health and Retirement Study, the analysis quantifies potential changes in the [...]

The goal of this paper is to determine whether the rapid accumulation of household debt in Croatia between 2005 and 2008 was driven by the improving creditworthiness of borrowers or their willingness to carry more debt due to optimistic expectations and the relaxation of banks' tending standards. A new approach is proposed which uses decomposition techniques previously employed in the analysis of wage gaps to capture risks related to the dynamics of household tending. We find that improved creditworthiness can explain only a minor part of the rise in the debt of Croatian households over the observed period (2005-2008). It was, rather, more lenient tending standards coupled with households' willingness to borrow in increasing amounts on the back of optimistic expectations that had a prominent rote in the expansion of household debt. The role of more lenient tending standards was especially pronounced in the case of highly indebted households, whose creditworthiness improved only very slightly or even deteriorated. Also, banks provided access to credit to more risky segments of the population as the creditworthiness of indebted households deteriorated relative to the general population. Comparative Economic Studies (2011) 53, 199-221. doi: 10.1057/ces.2011.14 Keywords: household debt, bank lending standards, household creditworthiness, sample selection models, quantile regression JEL Classifications: D14, D19, G21, C14, INTRODUCTION The rapid growth of Croatian household debt relaxed financial constraint among households, allowing them to frontload some of their consumption on expectations of rapidly growing incomes. (1) However, this [...]

In a general equilibrium model, we allow for households with several, typically heterogeneous, members; households that make (efficient) collective consumption decisions where different households may use different collective decision mechanisms; yet households that operate within a competitive market environment. The interaction of two allocation mechanisms, collective decisions and competitive markets, is investigated, with a focus on the efficiency properties and decentralization possibilities of the dual allocation mechanism.

The paper derives predictions about the impact of the price of housing, young adults' income and parental income on the probability that a young adult lives apart from his/her parents. It shows that the predicted effect of the price of housing is intimately related to the price elasticity of housing demand. It uses longitudinal data on a cohort of Britons born in 1958 (surveyed in the National Child Development Study) to estimate dynamic models of first departure from the parental home, and particularly to estimate the impact of housing price on the timing and destination of first departure.

An examination of household expenditures as reflected in the Family Expenditure Surveys of 1979-92 revealed trends that differ markedly from changes in household incomes gleaned from earlier surveys. Though no single measure can be reflective of all the aspects of living standards, expenditure may be the most ideal since it factors in the possibility that households will smooth consumption when income is variable. The inequality in expenditure increased rapidly between the early 1980s and early 1990s, though not as much as income inequality.

The rapid growth in inequality of incomes in the UK offers proof of increasing permanent inequality and increasing short-term income risk. A comparison of cohorts has revealed that younger cohorts experience remarkably greater inequality than did older cohorts at the same age. Minimal changes and increases were also noted for measures of poverty based on incomes for younger cohorts, whereas measures based on expenditures have usually been on the decline in the 1980s.

Eight explanations for UK income inequality trends between 1971 and 1986 are assessed by pooling evidence from inequality index decompositions by population sub-group and by income source. The principal causes of the aggregate trends were a mixture of changes in earnings inequality, employment structure and unemployment, but this mixture changed over time. The impact of wage inequality changes on income inequality changes fell during the 1970s and 1980s, reflecting the secular decline in the importance of employment earnings for household income packages. Unemployment changes had their largest impact at the start of the 1980s. Between 1981 and 1986 self-employment income changes appear to have had the largest influence.

Variations in cost-of-living indices between different types of UK households are studied. Chained series of pairwise Tornqvist indices are used in calculating the indices. Alternative all-item cost-of-living indices are also calculated using two possible methods of calculating housing costs. Results suggest small differences in the growth ofcost of living at the end of the period. However, the top and bottom of the income distribution and between demographic groups had widely varying inflation rates.

The changing nature of today's economy, coupled with demographic trends, has created new consumer issues in the area of household financial management. In many cases, financial institutions and other relevant [...]

The possibility of sunspot equilibria and endogenous cycles are explored in a two-sector overlapping-generations model with entry. It is shown that if prospective entrants act oligopolistically as producers but competitively as consumers then a strategic complementarity between the entry decisions of agents across sectors and across time may arise. If the complementarity is sufficiently strong, the economy will have multiple, Pareto-ranked steady states. Stationary sunspot equilibria can then be constructed as a randomization between allocations in the neighbourhood of the multiple steady states providing a source of aggregate fluctuations.

The literatures on the assessment of income distributions and on differences in needs are not well integrated. The theoretical literature providing results about evaluations and comparisons of income distributions does not, in the main, consider the implications of non-income differences between income-receiving units, while the equivalence scale literature providing results about the relationship between living standards, incomes and household composition does not consider distributional implications. The aim of this survey is to go some way towards integrating these separate literatures; to consider how to evaluate and compare income distributions while at the same time taking explicit account of differences in household composition.

Ricardian equivalence may be a good approximation even if all households have finite horizons, many households have short horizons, and an appreciable fraction of wage income is received by liquidity-constrained households. The approximation is likely to be better, the more imperfect annuity markets are.

The paper compares implications of three kinds of models of households' consumption behaviour: the basic permanent-income model, several models of liquidity-constrained households, and a model of an informationally-constrained efficient contract. These models are distinguished in terms of implications regarding the present discounted values of net trades to households at various levels of temporary income, and the households' marginal rates of substitution. Martingale consumption is studied as an approximation to the predicted consumption process of the efficient-contract model.