The Review of Economics and Statistics, Oct 1, 2017
This Philadelphia Fed working paper represents preliminary research that is being circulated for ... more This Philadelphia Fed working paper represents preliminary research that is being circulated for discussion purposes. The views expressed in these papers are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. Philadelphia Fed working papers are free to download at: .
In this paper we focus on the recent restructuring of the Italian pension system and in particula... more In this paper we focus on the recent restructuring of the Italian pension system and in particular on the reforms concerning the tax-favored retirement saving accounts. These reforms issued in the early and mid-1990s reduced the riskiness of private retirement saving plans and their overall cost. We find that private pension saving incentives had little if any effect on household savings. Further, those workers who have experienced the most severe public pension cut are not significantly more likely to contribute to a private retirement plan, ceteris paribus. We find, however, that the pension fund legislation had a strong effect on the allocation of savings and triggered substantial substitution of non-tax-favored nonretirement wealth for tax-favored pension funds.
This paper estimates the costs of participating to the stock market, together with the cross sect... more This paper estimates the costs of participating to the stock market, together with the cross sectional dispersion of stock market optimism. Our analysis is based on a mean-variance framework, when there is a riskless asset (cash), which makes the allocation of the investment in risky assets (stocks and bonds) independent on preferences. Within this framework, we derive "structural" decision rules for the composition of the risky asset portfolio to be e¢cient. These rules depend on the amount invested in the risky portfolio and on investors' optimism, which are the determinants of the stock market return expected by a household, when participation involves a …xed cost. Using these rules and the heterogeneity in risky assets holdings and in the degree of optimism, we identify both the …xed costs of stock investment and the variance of optimism. Using the Italian Survey of Household Income and Wealth we …nd that the risky asset portfolios of Italian households are coherent with a …xed cost of participating to the stock market around 150 euros per year (0.9 % of non-durable expenditure). Having a university degree, owning one's home and living in the North of the country contribute to lower the cost. The standard deviation of investors' optimism is estimated to be high, at around 30 percent.
We use household survey data to construct a direct measure of absolute risk aversion based on the... more We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to buy a risky asset. We relate this measure to a set of consumers' decisions that in theory should vary with attitude towards risk. We …nd that elicited risk aversion has considerable predictive power for a number of key household decisions such as choice of occupation, portfolio selection, moving decisions and exposure to chronic diseases in ways consistent with theory. We also use this indicator to address the importance of self-selection when relating indicators of risk to individual saving decisions.
We use household survey data to construct a direct measure of absolute risk aversion based on the... more We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to buy a risky asset. We relate this measure to a set of consumers' decisions that in theory should vary with attitude towards risk. We …nd that elicited risk aversion has considerable predictive power for a number of key household decisions such as choice of occupation, portfolio selection, moving decisions and exposure to chronic diseases in ways consistent with theory. We also use this indicator to address the importance of self-selection when relating indicators of risk to individual saving decisions.
This paper builds a unifying framework that, within the theory of intertemporal consumption choic... more This paper builds a unifying framework that, within the theory of intertemporal consumption choices, brings together the limited participation -based explanation of the poor empirical performance of the C-CAPM and the transaction costs-based explanation of incomplete portfolios. Using the implications of the consumption model and observed household consumption and portfolio choices, we identify the preference parameters of interest and a lower bound for the costs rationalizing non-participation in financial markets, in the presence of unobserved heterogeneity in tastes for consumption and portfolio allocation. Using the US Consumer Expenditure Survey and assuming isoelastic preferences, we estimate the coefficient of relative risk aversion at 1.7 and a cost bound of 0.4 percent of non-durable consumption. Our estimate of the preference parameter is theoretically plausible and the bound sufficiently small to be likely to be exceeded by the actual total (observable and unobservable) costs of participating to financial markets.
We investigate the effect of declining house prices on household consumption behavior during 2006... more We investigate the effect of declining house prices on household consumption behavior during 2006-2009. We use an individual-level dataset that has detailed information on borrower characteristics, mortgages and credit risk. Proxying consumption by individual-level auto loan originations, we decompose the effect of declining house prices on consumption into three main channels: wealth effect, household financial constraints, and bank health. We find a negligible wealth effect. Tightening householdlevel financial constraints can explain 40-45 percent of the response of consumption to declining house prices. Deteriorating bank health leads to reduced credit supply both to households and firms. Our dataset allows us to estimate the effect of this on households as 20-25 percent of the consumption response. The remaining 35 percent is a general equilibrium effect that works via a decline in employment as a result of either lower credit supply to firms or the feedback from lower consumer demand. Our estimate of a negligible wealth effect is robust to accounting for the endogeneity of house prices and unemployment. The contribution of tightening household financial constraints goes down to 35 percent, whereas declining bank credit supply to households captures about half of the overall consumption response, once we account for endogeneity. JEL CLASSIFICATION: E32, O16.
Despite the lack of delegated monitor and of collateral guarantees P2P lending platforms exhibit ... more Despite the lack of delegated monitor and of collateral guarantees P2P lending platforms exhibit relatively low loan and delinquency rates. The adverse selection is indeed mitigated by a new screening technology (information processing through machine learning) that provides costless public signals. Using data from Prosper and Lending Club we show that loans' spreads, proxing asymmetric information, decline with credit scores or hard information indicators and with indications from "group ties" (soft information from social networks). Also an increase in the risk of bank run in the traditional banking sector increases participation in the P2P markets and reduces their rates (substitution effect). We rationalize this evidence with a dynamic general equilibrium model where lenders and borrowers choose between traditional bank services (subject to the risk of bank runs and early liquidation) and P2P markets (which clear at a pooling price due to asymmetric information, bu...
We use household survey data to construct a direct measure of absolute risk aversion based on the... more We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to buy a risky asset. We relate this measure to a set of consumers’ decisions that in theory should vary with attitude towards risk. We find that elicited risk aversion has considerable predictive power for a number of key household decisions such as choice of occupation, portfolio selection, moving decisions and exposure to chronic diseases in ways consistent with theory. We also use this indicator to address the importance of self-selection when relating indicators of risk to individual saving decisions.
I use subjective expectations data on future asset returns from the Italian Survey of Household I... more I use subjective expectations data on future asset returns from the Italian Survey of Household Income and Wealth to validate widely used financial literacy questions. I argue that financial literacy and the willingness to answer these expectations questions are conceptually related constructs. In fact, both build on financial knowledge and skills and on confidence. From the estimation of simple probit models, I find evidence of positive correlation between responding expectations questions and answering correctly the questions that are typically used to appraise individual financial literacy in surveys. If these latter questions captured just numeracy or generic cognitive skills, the size and significance of their coefficients would go to zero when one controls for formal education. This is not the case, which suggests that they capture knowledge and skills that may indeed be at the basis of financial competence. In addition, based on decomposition analysis, I find that the questions with the largest information content are those eliciting knowledge and skills which are at the basis of day-today financial decision making. These include the questions assessing the ability to read a bank statement and the understanding of the effects of inflation.
This paper tests the impact of firms' ownership structure on innovation in a context featuring pr... more This paper tests the impact of firms' ownership structure on innovation in a context featuring pronounced ownership concentration and conflicts between large and minority shareholders. Using data for 20,000 Italian manufacturers, and accounting for the possible endogeneity of ownership levels, we find that ownership concentration negatively affects innovation, especially by reducing R&D effort. Conflicts between large and minority shareholders appear to be a determinant of this effect. Moreover, risk aversion induced by lack of diversification exacerbates large shareholders' reluctance to innovate. Family owners support innovation more than financial institutions, but the benefits of financial institutions increase with their equity stakes.
In this paper we focus on the recent restructuring of the Italian pension system and in particula... more In this paper we focus on the recent restructuring of the Italian pension system and in particular on the reforms concerning the tax-favored retirement saving accounts. These reforms issued in the early and mid- 1990s reduced the riskiness of private retirement saving plans and their overall cost. We find that private pension saving incentives had little if any effect on household savings. Further, those workers who have experienced the most severe public pension cut are not significantly more likely to contribute to a private retirement plan, ceteris paribus. We find, however, that the pension fund legislation had a strong effect on the allocation of savings and triggered substantial substitution of non-tax-favored nonretirement wealth for tax-favored pension funds.
The Review of Economics and Statistics, Oct 1, 2017
This Philadelphia Fed working paper represents preliminary research that is being circulated for ... more This Philadelphia Fed working paper represents preliminary research that is being circulated for discussion purposes. The views expressed in these papers are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. Philadelphia Fed working papers are free to download at: .
In this paper we focus on the recent restructuring of the Italian pension system and in particula... more In this paper we focus on the recent restructuring of the Italian pension system and in particular on the reforms concerning the tax-favored retirement saving accounts. These reforms issued in the early and mid-1990s reduced the riskiness of private retirement saving plans and their overall cost. We find that private pension saving incentives had little if any effect on household savings. Further, those workers who have experienced the most severe public pension cut are not significantly more likely to contribute to a private retirement plan, ceteris paribus. We find, however, that the pension fund legislation had a strong effect on the allocation of savings and triggered substantial substitution of non-tax-favored nonretirement wealth for tax-favored pension funds.
This paper estimates the costs of participating to the stock market, together with the cross sect... more This paper estimates the costs of participating to the stock market, together with the cross sectional dispersion of stock market optimism. Our analysis is based on a mean-variance framework, when there is a riskless asset (cash), which makes the allocation of the investment in risky assets (stocks and bonds) independent on preferences. Within this framework, we derive "structural" decision rules for the composition of the risky asset portfolio to be e¢cient. These rules depend on the amount invested in the risky portfolio and on investors' optimism, which are the determinants of the stock market return expected by a household, when participation involves a …xed cost. Using these rules and the heterogeneity in risky assets holdings and in the degree of optimism, we identify both the …xed costs of stock investment and the variance of optimism. Using the Italian Survey of Household Income and Wealth we …nd that the risky asset portfolios of Italian households are coherent with a …xed cost of participating to the stock market around 150 euros per year (0.9 % of non-durable expenditure). Having a university degree, owning one's home and living in the North of the country contribute to lower the cost. The standard deviation of investors' optimism is estimated to be high, at around 30 percent.
We use household survey data to construct a direct measure of absolute risk aversion based on the... more We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to buy a risky asset. We relate this measure to a set of consumers' decisions that in theory should vary with attitude towards risk. We …nd that elicited risk aversion has considerable predictive power for a number of key household decisions such as choice of occupation, portfolio selection, moving decisions and exposure to chronic diseases in ways consistent with theory. We also use this indicator to address the importance of self-selection when relating indicators of risk to individual saving decisions.
We use household survey data to construct a direct measure of absolute risk aversion based on the... more We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to buy a risky asset. We relate this measure to a set of consumers' decisions that in theory should vary with attitude towards risk. We …nd that elicited risk aversion has considerable predictive power for a number of key household decisions such as choice of occupation, portfolio selection, moving decisions and exposure to chronic diseases in ways consistent with theory. We also use this indicator to address the importance of self-selection when relating indicators of risk to individual saving decisions.
This paper builds a unifying framework that, within the theory of intertemporal consumption choic... more This paper builds a unifying framework that, within the theory of intertemporal consumption choices, brings together the limited participation -based explanation of the poor empirical performance of the C-CAPM and the transaction costs-based explanation of incomplete portfolios. Using the implications of the consumption model and observed household consumption and portfolio choices, we identify the preference parameters of interest and a lower bound for the costs rationalizing non-participation in financial markets, in the presence of unobserved heterogeneity in tastes for consumption and portfolio allocation. Using the US Consumer Expenditure Survey and assuming isoelastic preferences, we estimate the coefficient of relative risk aversion at 1.7 and a cost bound of 0.4 percent of non-durable consumption. Our estimate of the preference parameter is theoretically plausible and the bound sufficiently small to be likely to be exceeded by the actual total (observable and unobservable) costs of participating to financial markets.
We investigate the effect of declining house prices on household consumption behavior during 2006... more We investigate the effect of declining house prices on household consumption behavior during 2006-2009. We use an individual-level dataset that has detailed information on borrower characteristics, mortgages and credit risk. Proxying consumption by individual-level auto loan originations, we decompose the effect of declining house prices on consumption into three main channels: wealth effect, household financial constraints, and bank health. We find a negligible wealth effect. Tightening householdlevel financial constraints can explain 40-45 percent of the response of consumption to declining house prices. Deteriorating bank health leads to reduced credit supply both to households and firms. Our dataset allows us to estimate the effect of this on households as 20-25 percent of the consumption response. The remaining 35 percent is a general equilibrium effect that works via a decline in employment as a result of either lower credit supply to firms or the feedback from lower consumer demand. Our estimate of a negligible wealth effect is robust to accounting for the endogeneity of house prices and unemployment. The contribution of tightening household financial constraints goes down to 35 percent, whereas declining bank credit supply to households captures about half of the overall consumption response, once we account for endogeneity. JEL CLASSIFICATION: E32, O16.
Despite the lack of delegated monitor and of collateral guarantees P2P lending platforms exhibit ... more Despite the lack of delegated monitor and of collateral guarantees P2P lending platforms exhibit relatively low loan and delinquency rates. The adverse selection is indeed mitigated by a new screening technology (information processing through machine learning) that provides costless public signals. Using data from Prosper and Lending Club we show that loans' spreads, proxing asymmetric information, decline with credit scores or hard information indicators and with indications from "group ties" (soft information from social networks). Also an increase in the risk of bank run in the traditional banking sector increases participation in the P2P markets and reduces their rates (substitution effect). We rationalize this evidence with a dynamic general equilibrium model where lenders and borrowers choose between traditional bank services (subject to the risk of bank runs and early liquidation) and P2P markets (which clear at a pooling price due to asymmetric information, bu...
We use household survey data to construct a direct measure of absolute risk aversion based on the... more We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to buy a risky asset. We relate this measure to a set of consumers’ decisions that in theory should vary with attitude towards risk. We find that elicited risk aversion has considerable predictive power for a number of key household decisions such as choice of occupation, portfolio selection, moving decisions and exposure to chronic diseases in ways consistent with theory. We also use this indicator to address the importance of self-selection when relating indicators of risk to individual saving decisions.
I use subjective expectations data on future asset returns from the Italian Survey of Household I... more I use subjective expectations data on future asset returns from the Italian Survey of Household Income and Wealth to validate widely used financial literacy questions. I argue that financial literacy and the willingness to answer these expectations questions are conceptually related constructs. In fact, both build on financial knowledge and skills and on confidence. From the estimation of simple probit models, I find evidence of positive correlation between responding expectations questions and answering correctly the questions that are typically used to appraise individual financial literacy in surveys. If these latter questions captured just numeracy or generic cognitive skills, the size and significance of their coefficients would go to zero when one controls for formal education. This is not the case, which suggests that they capture knowledge and skills that may indeed be at the basis of financial competence. In addition, based on decomposition analysis, I find that the questions with the largest information content are those eliciting knowledge and skills which are at the basis of day-today financial decision making. These include the questions assessing the ability to read a bank statement and the understanding of the effects of inflation.
This paper tests the impact of firms' ownership structure on innovation in a context featuring pr... more This paper tests the impact of firms' ownership structure on innovation in a context featuring pronounced ownership concentration and conflicts between large and minority shareholders. Using data for 20,000 Italian manufacturers, and accounting for the possible endogeneity of ownership levels, we find that ownership concentration negatively affects innovation, especially by reducing R&D effort. Conflicts between large and minority shareholders appear to be a determinant of this effect. Moreover, risk aversion induced by lack of diversification exacerbates large shareholders' reluctance to innovate. Family owners support innovation more than financial institutions, but the benefits of financial institutions increase with their equity stakes.
In this paper we focus on the recent restructuring of the Italian pension system and in particula... more In this paper we focus on the recent restructuring of the Italian pension system and in particular on the reforms concerning the tax-favored retirement saving accounts. These reforms issued in the early and mid- 1990s reduced the riskiness of private retirement saving plans and their overall cost. We find that private pension saving incentives had little if any effect on household savings. Further, those workers who have experienced the most severe public pension cut are not significantly more likely to contribute to a private retirement plan, ceteris paribus. We find, however, that the pension fund legislation had a strong effect on the allocation of savings and triggered substantial substitution of non-tax-favored nonretirement wealth for tax-favored pension funds.
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