PAPERS

Love & Loans. The Effect of Beauty and Personal Characteristics in Credit Markets, July 2008.

I examine whether easily observable variables such as the personal characteristics of a loan applicant and the way he presents himself affect lenders' decisions, once hard financial information about credit scores, employment history, homeownership, and other financial information are taken into account. I study an online lending market in which 7,321 borrowers posted 11,957 loan requests that included verifiable financial information, photos, an offered interest rate, and related context. Borrowers whose appearance is rated above average are 1.41 percentage points more likely to get a loan and, given a loan, pay 81 basis points less than an average-looking borrower with the same credentials. Black borrowers pay between 139 and 146 basis points more than otherwise similar White borrowers. However, in my sample such personal characteristics are not, all else equal, significantly related to subsequent delinquency rates - with the exception of beauty, which is associated with substantially higher delinquency rates. The findings suggest that the mechanism through which personal characteristics affect loan supply is lenders' preferences and perception, rather than statistical discrimination, based on inferences from previous experience.

Risk Aversion and Wealth. Evidence from Person-to-Person Lending Portfolios. (with Daniel Paravisini and Veronica Rappoport), November 2009.

We estimate risk aversion from the actual financial decisions of a sample of 2,168 U.S. investors participating in a person-to-person lending platform. We find a large degree of heterogeneity in the relative risk aversion (RRA) parameter, with an average of 2.85, and a median of 1.62.  We exploit the panel dimension of the data to estimate independently the correlation between risk aversion and wealth in the cross section of investors, and the elasticity of risk aversion with respect to changes in wealth for a given investor. Using house prices as an indicator of investor wealth, we find a positive, although economically small, correlation between relative risk aversion and wealth in the cross section. In contrast, when we employ investors fixed effect to estimate the within-person elasticity, we find that it is negative and substantial (-4.2). Our estimation procedure allows us to test rationality and the consistency of investor behavior.

What Do Independent Directors Know? Evidence from their Trading? (with Paola Sapienza) The Review of Financial Studies, September 2009.

We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with the weakest governance and the gap between these two groups widens in such firms. Independent directors who sit on the audit committee earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around earnings restatements.

Increasing Income Inequality, External Habits, and Self-Reported Happiness (with Karen Dynan) American Economic Review, P&P, May 2007.

In this short paper we take a first look at the question of whether the increasing income inequality that the US has witnessed in the past 25 years has generated increasing unhappiness in those who have been falling behind, despite their real income has risen markedly. If an individual's utility depends not only on the level of her own consumption but also on how that level compares with the consumption of others, then the observed widening of the income distribution may have implications for the happiness of different groups that go beyond those associated with the changes in their respective incomes. We find that people's happiness appears to depend positively on how well their socio-economic group is doing relative to the average in their geographic area, even after controlling for the level of their own income. In addition, we find some evidence that the relationship is much stronger for people whose group has above-average income than for people whose group has below-average income; it would thus appear that relative concerns do not become an issue until a person has attained a certain place within the income distribution.

Appendix

Habit Formation and Keeping Up with the Joneses: Evidence from Micro Data (November 2007) Submitted

This paper provides evidence that habit persistence is an important determinant of household consumption choices, in a setting that allows for heterogeneity and household-specific interest rates. By estimating Euler equations for a representative sample of U.S. credit card account holders, I find that the strength of the external habit, captured by the fraction of the consumption of the reference group that enters the utility function, is 0.290; while the strength of internal habit, represented by household past consumption, is 0.503. These findings provide empirical support to the theories that explain macroeconomic and asset pricing phenomena by introducing habit persistence in the utility function. The results are robust to the inclusion of the income growth rate and other measures of economic activity in the regression, changes in the specification and the instrument set, and tests of liquidity constraints and precautionary saving motives. I also show that this result carries over in the aggregate, once heterogeneity and market incompleteness are taken into account by aggregating the Euler equations as a weighted average of individual marginal rates of substitution. On the contrary, I find that an econometrician that used per capita consumption, constructed from the same data, and a representative agent framework, would find no evidence of habit persistence.

Appendix

Procrastination and Credit Cards: A Time Inconsistency Story (September 2003)

This paper studies the extent and consequences of procrastination and systematic planning fallacy in credit card usage and borrowing, in the attempt to explain widespread credit card borrowing at high rates and seemingly sub-optimal responses to changes in the terms of use. I build a simple model that captures these phenomena, compare its predictions with those of other theories of consumption and borrowing behavior and delineate empirical strategies to evaluate the model with data on household financial portfolios. The role of alternative explanations involving rational time-consistent individuals facing transaction costs in the loan markets or exhibiting risk aversion and precautionary motives against future income uncertainty is analyzed and empirical implications aimed at distinguishing among the competing explanations are suggested. In addition, the consequences of the different degrees of awareness of the procrastination problems and the effect of imperfect learning about one's will power are briefly discussed and constitute directions of future investigation. The results contribute to the understanding of consumer borrowing behavior, the reasons people are late in paying and the reasons they stop paying, and therefore to evaluate their riskiness and design better credit policies.

WORK IN PROGRESS

Language and Persuasion in Financial Transactions

Local Portfolios and their Information Content

The Portfolios of Wealthy U.S. Households (with Luis Viceira and Ingo Walter