Windfall Gains and Stock Market Participation (Revising for the Journal of Financial Economics)
(with David Cesarini, Erik Lindqvist, and Robert Östling)
We estimate the causal effect of wealth on participation in several asset markets using data on Swedish lottery players. A $150,000 windfall gain increases stock ownership probability by 12 percentage points among pre-lottery nonparticipants, with no discernible effect on pre-lottery stock owners. The effect is immediate, heterogeneous in intuitive ways, and smaller than predicted by a plausibly calibrated lifecycle model. Additional analyses suggest limited roles for real estate, debt, and procrastination. However, many players eschew equities for bonds, especially following periods of negative equity returns. Overall, results suggest that "nonstandard" beliefs or preferences contribute to equity nonparticipation across many demographic groups.
Long Term Care Utility and Late in Life Saving (Revising for the Journal of Political Economy)
(with John Ameriks, Andrew Caplin, Matthew Shapiro, and Chris Tonetti )
Older wealthholders spend down assets slowly. To study this pattern, the paper introduces health dependent utility into a model in which different preferences for bequests, expenditures when in need of long-term care (LTC), and ordinary consumption combine with health and longevity uncertainty to determine saving behavior. To help separately identify motives, it develops Strategic Survey Questions (SSQs) that elicit stated preferences. The model is estimated using new SSQ and wealth data from the Vanguard Research Initiative. Estimates of the health-state utility function imply that motives associated with LTC are significantly more important than bequest motives in determining late in life saving.
Late-in-Life Risks and the Under-Insurance Puzzle
(with John Ameriks, Andrew Caplin, Matthew Shapiro, and Chris Tonetti)
Individuals face significant late-in-life risks, including potential long-term care (LTC) needs. Yet they hold little corresponding insurance (LTCI). We investigate the degree to which a fundamental lack of interest, poor product features, and possible behavioral factors determine low LTCI holdings. We estimate a rich set of individual-level preferences and use a life-cycle model to find that ideal insurance would be far more widely held than are products in the market. We find that laws in existing products provide only a partial explanation for this under-insurance puzzle, with analogous findings for the gap between estimated and actual annuity holdings. Our results derive from “strategic survey questions” that identify preferences as well as stated demand questions.
(with Chris Tonetti)