Essays on Household Finance

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This thesis comprises three essays addressing theory and evidence on the household response to tax-favored saving incentive schemes, with a particular emphasis on household risk taking. The US tax code and related regulatory institutions offer a variety of incentives to encourage US households to save and participate in risky investment schemes such as defined contribution (DC) accounts and employer-sponsored stock compensation schemes. In exchange for tax incentives, employers and employees are subject to a variety of regulatory restrictions when they participate in the plans affecting the choices available to employees. These incentives and restrictions provide a natural setting to theorize about and study the economic behavior of households. The first essay summarizes the theory and evidence on the effect of DC retirement accounts on household wealth accumulation and portfolio choices. The emphasis of this chapter is on documenting the empirical successes and failures of standard economic model of lifetime household portfolio choice, in which precautionary savings motives tradeoff against retirement savings motives to produce sharp predictions about DC account choices. The second essay evaluates the welfare loss to an employee participating in a DC plan where the employer provides matching contributions to an employee's DC account using the employer's stock instead of an unrestricted investment in diversified mutual funds. Calibration of the model to plausible lifetime savings and portfolio choices demonstrates that long dated holding requirements should lead employees to privately discount their holding by as much as 70% of its value. The thirds essay develops a simple analytic framework that provides closed form expressions for the cost of holding undiversified single stock positions over an interval of time. The cost increases with an increase in: risk aversion; holding horizon; the idiosyncratic risk of the stock; and the association between the idiosyncratic risk of the stock and the employee's human capital.

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  • 06/05/2018
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