Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans

We study the role that recourse plays in the commercial real estate loan contracts of the largest U.S. banks. We find that recourse is valued by lenders and is treated as a substitute for conventional equity. At origination, recourse loans have rate spreads that are at least 20 basis points lower and loan-to-value ratios that are around 3 percentage points higher than non-recourse loans. Dynamically, recourse affects loan modification negotiations by providing additional bargaining power to the lender. Recourse loans were half as likely to receive accommodation during the COVID-19 pandemic, and the modifications that did occur entailed a relatively smaller reduction in payments.

Entry, Variable Markups, and Business Cycles

The creation of new businesses declines in recessions. In this paper, I study the effects of pro-cyclical business formation on aggregate employment in a general equilibrium model of firm dynamics. The key features of the model are that the elasticity of demand faced by firms falls with their market share and that adjustment costs slow the reallocation of employment between firms. In response to a decline in entry, incumbent firms' market shares increase, their elasticity of demand falls, and they increase their markups and reduce employment. To quantify the model, I study the relationship between variable input use and revenue in panel data on large firms. Viewed through the lens of my model, my estimates imply that for large firms, the within-firm elasticity of the markup to relative sales is 25 percent. I use the calibrated model to study shocks to entry, finding that a fall in entry can lead to a significant contraction in employment. A shock to entry that replicates the decline in the number of businesses during the Great Recession generates a prolonged 2.5 percent fall in employment in the model. Finally, I show that the declining correlation between revenue and variable input use over the past 30 years implies that the effect of entry on the business cycle has become stronger over time.

Corporate Taxes and the Earnings Distribution: Effects of the Domestic Production Activities Deduction

This paper investigates how corporate tax changes affect workers’ earnings. We use a dataset of U.S. worker-level W-2 filings matched with corporate tax returns and study the implementation of the Domestic Production Activities Deduction (DPAD). We find the DPAD tax rate reduction has a substantial effect on the distribution of annual wage earnings within a firm. Earnings of workers at the top of their firm’s earnings distribution rise relative to those at the bottom of the distribution. We estimate a semi-elasticity of average earnings of 1.1 with respect to the DPAD marginal tax rate reduction, while the semi-elasticity of median earnings is notably smaller—0.5. Furthermore, we estimate a semi-elasticity of 1.3 at the 95th percentile of workers’ earnings and 2.7 at the 99th percentile. This trend of larger semi-elasticities at the top of the earnings distribution is especially pronounced for small firms. Looking at overall employment effects, we see no change overall, but the number of employees rises at small firms and declines at large firms. In contrast, we find that capital investment rises for large firms, suggesting that the DPAD also resulted in domestic capitallabor substitution for large corporations. Our paper has significant implications for assessing the progressivity of the U.S. tax code and for analyzing the effect of corporate tax policy changes on the U.S. income distribution.

Equilibrium Unemployment: The Role of Discrimination

U.S. labor markets are increasingly diverse and persistently unequal between genders, races and ethnicities, skill levels, and age groups. We use a structural model to decompose the observed differences in labor market outcomes across demographic groups in terms of underlying wedges in fundamentals. Of particular interest is the potential role of discrimination, either taste-based or statistical. Our model is a version of the Diamond-Mortensen-Pissarides model extended to include a life cycle, learning by doing, a nonparticipation state, and informational frictions. The model exhibits group-specific wedges in initial human capital, returns to experience, matching efficiencies, and job separation rates. We use the model to reverse engineer group-specific wedges that we then feed back into the model to assess the fraction of various disparities they account for. Applying this methodology to 1998–2018 U.S. data, we show that differences in initial human capital, returns to experience, and job separation rates account for most of the demographic disparities; wedges in matching efficiencies play a secondary role. Our results suggest a minor aggregate impact of taste-based discrimination in hiring and an important role for statistical discrimination affecting particularly female groups and Black males. Our approach is macro, structural, unified, and comprehensive.

Motivating Banks to Lend? Credit Spillover Effects of the Main Street Lending Program

We study the effects of the Main Street Lending Program (MSLP) an emergency lending program aimed at supporting the flow of credit to small and mid-sized firms during the COVID-19 crisis on bank lending to businesses. Using instrumental variables for identification and multiple loan-level and survey data sources, we document that the MSLP increased banks' willingness to lend more generally outside the program to both large and small firms. Following the introduction of the program, participating banks were more likely to renew maturing loans and to originate new loans, as well as less likely to tighten standards on business loans than nonparticipating banks. Additional evidence suggests that the MSLP, despite low take-up, supported the flow of bank credit during the pandemic by serving as a backstop to the bank loan market and by increasing banks' levels of risk tolerance in the face of uncertainty.

The Smart Money is in Cash? Financial Literacy and Liquid Savings Among U.S. Families

Most financial advisors recommend storing three to six months of expenses in liquid assets in case of an emergency. Yet we estimate that more than half of U.S. families do not have at least three months of their non-discretionary expenses in liquid savings. We find that financial literacy is strongly predictive of having three months of liquid savings, controlling for income, income variability, and even parental resources. We also find that financial literacy predicts liquid savings across the income distribution. These results indicate that accumulation of an emergency fund is not simply a function of income. Finally, financial literacy is predictive of liquid savings even among high illiquid wealth households. This suggests that the phenomenon of "wealthy hand-to-mouth" families may reflect financial mistakes rather than portfolio optimization. Our paper highlights the importance of financial knowledge in explaining families' preparedness to deal with unexpected expenses or disruption in their income.

Words Speak as Loudly as Actions: Central Bank Communication and the Response of Equity Prices to Macroeconomic Announcements

While the literature has already widely documented the effects of macroeconomic news announcements on asset prices, as well as their asymmetric impact during good and bad times, we focus on the reaction to news based on the description of the state of the economy as painted by the Federal Open Market Committee (FOMC) statements. We develop a novel FOMC sentiment index using textual analysis techniques, and find that news has a bigger (smaller) effect on equity prices during bad (good) times as described by the FOMC sentiment index. Our analysis suggests that the FOMC sentiment index offers a reading on current and future macroeconomic conditions that will affect the probability of a change in interest rates, and the reaction of equity prices to news depends on the FOMC sentiment index which is one of the best predictors of this probability.

Decomposing Gender Differences in Bankcard Credit Limits

In this paper, we examine if there are gender differences in total bankcard limits by utilizing a data set that links mortgage applicant information with individual-level credit bureau data from 2006 to 2016. We document that after controlling for credit score, income, and demographic characteristics, male borrowers on average have higher total bankcard limits than female borrowers. Using a standard Kitagawa-Oaxaca-Blinder decomposition, we find that 87 percent of the gap is explained by differences in the effect of observed characteristics between male and female borrowers, while approximately 10 percent of the difference can be explained by differences in the levels of observed characteristics. Using a quantile decomposition strategy to analyze the gender gap along the entire bankcard credit limit distribution, we show that gender differences in bankcard limits favor female borrowers at smaller limits and favor male borrowers at larger limits. The primary factors that drive this gap have changed over time and vary across the distribution of credit limits.

Does Access to Bank Accounts as a Minor Improve Financial Capability? Evidence from Minor Bank Account Laws

Banking the unbanked is a common policy goal, but should this include access to bank accounts for minors? This study estimates how teenagers' access to bank accounts affects their financial development. Using variation in state laws, we show policies that permit access to independently-owned accounts increase account ownership at age 16 through age 19, although by age 24 those young adults are banked at similar rates to teens who grew up in states that do not allow minors to own accounts independently. Teens who had access to independently-owned accounts use fewer high-cost alternative financial services (like payday loans) through age 20—but are then more likely to use AFS, particularly check-cashing services, from age 21 through 24. Using credit records, we show that access to non-custodial accounts has no effects on credit scores in the short-run, but lower credit scores and more loan delinquencies at ages 21 through 24. While these state laws promote financial inclusion for teenagers, the young people who take on accounts may experience negative consequences in the longer run.

Macroeconomic Implications of Inequality and Income Risk

We explore the long-run relationship between income risk, inequality, and the macroeconomy in an overlapping-generations model in which households face uncertain streams of labor income and returns on their savings. To manage those risks, households can apportion their savings to a bond, whose return is safe and identical across households, and a productive asset, whose return is uncertain and can differ persistently across households. We find that greater polarization in households’ labor income and returns on their savings generally accentuates households’ demand for risk-free assets and the compensation they require for bearing risk, leading to higher measured income and wealth inequality, a lower risk-free real interest rate, and higher risk premiums. These findings suggest that the factors behind the observed rise in inequality over the past few decades might have contributed to the observed fall in the risk-free real interest rate and widening gap between the risk-free real interest rate and the rate of return on capital. We also find that the magnitude of the decline in the risk-free real interest rate and offsetting rise in risk premiums depend importantly on the source of income polarization, with the effects being especially large when greater inequality is caused by increased dispersion in returns on risky assets. Thus, the macroeconomic implications not only depend on the amount of inequality, but also the source of this inequality.