American Economic Review, September 2014, 104(9): 2830-57.
with Christopher Mayer, Edward Morrison, and Tomasz Piskorski
We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with subprime mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide's relative delinquency rate increased thirteen percent per month immediately after the program's announcement. The borrowers whose estimated default rates increased the most in response to the program were those who appear to have been the least likely to default otherwise, including those with substantial liquidity available through credit cards and relatively low combined loan-to-value ratios. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs.
Journal of Legal Studies, June 2016, 54(2):571-505
with Christopher Hansman and Ethan Frenchman
Roughly 450,000 people are detained awaiting trial on any given day, typically because bail has not been posted. Using a large sample of criminal cases in Philadelphia and Pittsburgh, we analyze the consequences of bail assessment and pretrial detentions by exploiting the variation in bail setting tendencies among randomly assigned bail judges. Our estimates suggest that the assignment of money bail leads to a 6 percentage point rise in the likelihood of pleading guilty, and a 4 percentage point rise in recidivism. We also find evidence for racial bias in bail setting. Our results highlight the importance of credit constraints in shaping defendant judicial outcomes and point to important fairness considerations in the institutional design of pretrial detention programs.
Forthcoming, Journal of Finance
I identify shocks to interest rates resulting from two administrative details in adjustable-rate mortgage contract terms: the choices of financial index and lookback period. I find that a 1 percentage point increase in interest rates at the time of ARM reset results in a 2.5 percentage rise in the probability of foreclosure in the following year; and that each foreclosure filing leads to an additional 0.3–0.6 completed foreclosures within a 0.10 mi radius. In explaining this result, I emphasize price effects, bank-supply responses, and borrower responses arising from peer effects.
with Kunal Sachdeva
Hedge fund managers contribute substantial personal capital, or “skin in the game,” into their funds. While these allocations may better align incentives, managers may also strategically allocate their private capital in ways that negatively affect investors. We find that funds with more inside investment outperform other funds within the same family. However, this relationship is driven by managerial decisions to invest capital in their least-scalable strategies and restrict the entry of new outsider capital into these funds. Our results suggest that skin in the game may work as a rent-extraction mechanism at the expense of fund participation of outside investors.
with Edward Morrison, Lawerence J. Cook, Heather Keenan, and Lenora M. Olson
This paper assesses the importance of adverse health shocks as triggers of bankruptcy filings. Using a sample of all auto crashes in Utah during a thirteen year period, we report two findings: (i) There is a strong positive correlation between an individual's financial condition and his or her likelihood of suffering a health shock, an example of behavioral consistency, and (ii) After accounting for this simultaneity, we are unable to identify a causal effect of health shocks on bankruptcy filing rates. These findings emphasize the importance of risk heterogeneity in determining financial fragility, raise questions about prior studies of "medical bankruptcy," and point to important challenges in identifying the triggers of consumer bankruptcy.
with Edward Morrison, Catherine R. Fedorenko, and Scott Ramsey
This paper explores the relationship between home equity and cancer-related mortality. We draw on data linking individual cancer records to administrative data on personal mortgages, bankruptcies, foreclosures, and credit reports. We present four findings: First, cancer diagnoses are financially destabilizing—as measured by mortgage de- faults, foreclosures, and bankruptcy filings—even among households with public or private health insurance. The instability is caused by out-of-pocket costs arising from work loss, transportation, and incomplete coverage of medical expenditures. Second, cancer diagnoses are destabilizing only for households that lack home equity, prevent- ing them from using their assets to smooth consumption. Third, individuals with positive home equity extract this equity (by refinancing a first mortgage or taking out a second mortgage) in response to cancer diagnoses. Fourth, individuals with access to home equity are more likely to accept recommended therapies and have higher post- diagnosis survival rates. Our findings are consistent with the idea that real estate plays an important role in understanding how individuals buffer idiosyncratic shocks.
with Christopher Hansman
We ask whether the correlation between mortgage leverage and default is due to moral hazard—the causal effect of leverage—or adverse selection: ex-ante risky borrowers choosing larger loans. We separate these information asymmetries using a natural experiment resulting from (i) the unique contract structure of Option Adjustable-Rate Mortgages and (ii) the unexpected 2008 divergence of the indices that determine interest rate adjustments. Moral hazard is responsible for 60-70% of the correlation, while adverse selection explains 30-40%. We construct and calibrate a simple model to show that optimal regulation of leverage must weigh default-prevention against market distortions due to adverse selection.
Honorable Mention, Yuki Arai Faculty Research Prize for Finance, 2018