SI 2022 Household Finance

We develop a machine-learning solution algorithm to solve for optimal portfolio choice in a lifecycle model that includes many features of reality modelled only separately in previous work. We use the quantitative model to evaluate the consumption-equivalent welfare losses from using simple rules for portfolio allocation across stocks, bonds, and liquid accounts instead of the optimal portfolio choices, both for optimizing households and for households that undersave. We find that the consumption-equivalent losses from using an age-dependent rule as embedded in current target-date/lifecycle funds (TDFs) are substantial, around 2 to 3 percent of consumption, despite the fact that TDF rules mimic average optimal behavior by age closely until shortly before retirement. Optimal equity shares have substantial heterogeneity, particularly by wealth level, state of the business cycle, and dividend-price ratio, implying substantial gains to further customization of advice or TDFs in these dimensions.

In 2021, U.S. private employers and the federal government devoted a combined $300bn to encourage contributions to retirement savings plans. In this paper, we study the distributional impact of these tax and employer match incentives across racial groups using a new linked employer-employee data set covering millions of Americans. On average, White workers contribute 4.6% of their salary to employer-sponsored retirement accounts whereas Black (Hispanic) workers contribute 2.9% (3.3%) of their salary. Differences in income across racial groups explain only one-third of this gap in retirement saving, and large disparities remain even after further controlling for education, occupation, county of residence, employer fixed effects, and homeownership. This gap in contributions, amplified by the tax and matching incentives, implies that the average Black (Hispanic) participant in a DC plan would retire with 51% (37%) less than the average White participant in their account. We explore two mechanisms driving differences in contribution between employees with similar individual-level characteristics. First, household composition and parental characteristics can explain nearly half of the residual gap in retirement contributions across racial groups. Second, we find evidence that Black and Hispanic individuals face tighter liquidity constraints. Black retirement savers are twice as likely as Whites to take an early withdrawal from their retirement account in any given year, a sign of limited access to alternative means of liquidity. These findings suggest that the institutional design of U.S. retirement plans, which rewards those who can and do save more, exacerbates racial wealth gaps and propagates wealth inequality across generations.

In most Western countries, migrants hold significantly less private wealth than their native counterparts. This paper presents evidence that a crucial factor in migrants' saving and investment choices is uncertainty about their right to stay in the host country. Exploiting a natural experiment and using panel data from Germany, I show that migrants who have access to citizenship save as much as natives once individual characteristics such as labour market outcomes are accounted for --- while migrants without this right persistently save about 30% less. This unexplained gap is closed completely when migrants in the latter group become eligible to apply for citizenship. To elucidate mechanisms, I develop a life cycle saving model where migrants choose their saving rate and retirement location under a risk of being asked to leave the host country once they stop working. The framework suggests that, if migrants can vary in their preferences for the host versus their home country, eliminating that risk, e.g. through naturalisation, increases the saving rate of migrants preferring to stay. Specifically, they invest more in profitable, country specific assets. The model also predicts that more migrants who prefer their home country choose to remain if risk in right to stay is eliminated. I substantiate these prediction empirically by documenting that migrants, once they are eligible for citizenship, become significantly more likely to tie up capital in assets such as mortgage saving plans, housing and private pension plans. They also become more likely to want to stay in the host country.

We show that attention constraints of decision makers function as barriers to financial inclusion. Using administrative data on retail loan screening processes, we find that loan officers exert less effort reviewing applicants from unattractive social or economic backgrounds and reject them more frequently than justified by credit quality. More importantly, when quasi-random workload variations tighten officer attention constraints, unattractive applicants receive even worse treatment—review-time halves and approval rates drop by approximately 40%—while attractive applicants are not affected. Our findings suggest that financial technologies that reduce information-processing costs may promote more balanced financial access.

We characterise the large number of mortgage offers for which people qualify. Almost no one picks the cheapest option, nonetheless the one selected is not usually much more expensive. A few borrowers make very expensive choices. These big mistakes are most common when the menu they face has many expensive options, and are most likely for high loan to value and loan to income borrowers. Young people and first-time buyers are more mistake-prone. The dispersion in the mortgage menu is consistent with banks attempting to price discriminate for some borrowers who might pick poorly while competing for others who might shop more effectively.

This papers studies how banks compete amid digital disruption and resulting distributional effects on financial inclusion. Using survey data, we document that digital consumers (younger, more-educated, and higher-income) have adapted to mobile banking, whereas non-digital consumers still heavily rely on brick-and-mortar branches. We build a model of bank competition with endogenous branching and entry decisions to show that the shift of digital consumers' preference from branch to digital services affects how banks compete which results in negative spillovers to non-digital consumers. We empirically test the model predictions by exploiting the staggered expansion of 3G networks across the U.S., and our identification strategies rely on difference-in-differences and instrumental-variable (the frequency of lightning strikes) analyses. We find that (1) banks close costly branches, especially in regions with more young people; (2) banks enter new markets with fewer branches which intensifies local competition; and (3) branching banks increase their prices, whereas non-branching banks lower prices. Consequently, non-digital consumers pay a higher cost to access financial services and thus face the risk of financial exclusion. Approximately, this channel causes 2.5 million previously banked individuals to lose banking access. Overall, the evidence highlights the role of banks' endogenous responses to digital disruption in widening digital inequality.