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Household Finance: Regulation and Intermediation

Paper Session

Sunday, Jan. 5, 2020 10:15 AM - 12:15 PM (PDT)

Manchester Grand Hyatt, Seaport H
Hosted By: American Finance Association
  • Chair: Motohiro Yogo, Princeton University

The Effect of Political Frictions on Long Term Care Insurance

Weiling Liu
Northeastern University
Jessica Liu
Harvard University


Despite sharply rising prices, the number of companies choosing to operate in the private long term care insurance (LTCI) has dropped from over 100 to just over 30 today. This paper analyzes how product mispricing and regulators' stringency jointly affected insurer dropout in the LTCI market. Using detailed data on LTCI pricing, we show that regulators' political climate-- including their election cycles, political capital, political affiliation, and campaign funding-- significantly affected price changes in the LTCI market and, subsequently, insurer profits. We then develop a dynamic structural model of insurance company and regulator interactions. Our model demonstrates how insurer supply and social welfare may be decreasing in regulator stringency when cost shocks are large and unpredictable. Using the calibrated model, we estimate that removing regulators' election cycles would gain $2.4mil in social welfare annually, equivalent to removing 8% of the cost shocks observed in the LTCI market.

Internal Deadlines, Drug Approvals, and Safety Problems

Lauren Cohen
Harvard Business School
Umit Gurun
University of Texas-Dallas
Danielle Li
Massachusetts Institute of Technology


Drug approvals around the world surge in December and at the end of each calendar month. Drugs approved in December and at month-ends are associated with significantly more adverse effects, and significantly more serious adverse effects such as hospitalizations, life-threatening incidents, and even deaths. These approval and adverse effects patterns are found in a large, global data set consisting of drug approvals from the United States, European Union, Japan, China, and South Korea, suggesting that this pattern reflects a behavioral regularity common across time, cultures, and regulatory regimes. In the United States, the number of December drug approvals is roughly 80% larger than in any other month (t =7.29). Moreover, in the United States we also observe an output spike before Thanksgiving - and in China before the Chinese New Year - but not the converse, and no associated spikes in countries in which these holidays are not celebrated. There are no explicit deadlines forcing drug approvals in December, nor do the December drugs appear different on any observable risk metrics – e.g., disease type, market size, or population targeted. The December approval effect is larger in years in which fewer drugs have been approved in the first part of the year, and these especially “rushed” years of December drugs have even higher amounts of adverse effects associated with them.

Decomposing Present-value Effects: Evidence from a large-scale restructuring experiment

Deniz Aydin
Washington University-St. Louis


Interest rate changes only have a small effect on borrower cash flows, but a substantially larger effect on the present-value (PV) of future obligations. We study these remote and elusive balance sheet effects of interest rates in the context of consumer debt restructuring. We design and implement a large scale debt relief program where we deliberately vary the interest rate, maturity and payment schedules. We find that simple redenominations of the same face-value have significant effects on the borrowers decision to whether and when to default. Although rate reductions have a smaller effect on current resources compared to temporary forbearance, and a comparable effect in terms of magnitude and persistence as maturity extensions, its efficacy in reducing defaults is substantially higher. We formulate a test of fungibility and decisively reject models where the decision to default depends solely on current flows. However, we also find strong evidence against models where resources are fungible, and find that a dollar change in current cash flows has a similar effect on defaults as a three dollar change in the present-value of future payments. From the perspective of the financial institution, offering either type of debt-relief decreases recovery, however balance sheet effects are sufficiently strong to make it an efficient way to incentive intermediaries.

Can Partial Commitment Increase Pension Contribution? A Field Experiment in Sri Lanka

Changcheng Song
Singapore Management University


We conduct several randomized controlled trials in more than 200 villages in Sri Lanka to study whether incentives and partial commitment pension designs generate higher participation and savings in the micro pension. In Experiment I, individuals are randomly assigned to a control group, a free installment group, and a matching group. We find that a free installment for the first month contribution increases the pension participation from 8 percentage points to 34 percentage points, and increases the pension contribution by 4 times. A 100% matching for the first month contribution also increases the participation and contributions, but the effect is smaller. We show that the results can be explained by that free Installment group attracts more present bias agents, and present bias agents are more likely to participate in the pension when they do not need to pay first month contribution. In Experiment II, we further compare a full commitment pension including only one commitment account with a partial commitment pension contract including a liquid account and a commitment account. Individuals are randomly assigned to four groups: full commitment pension with high withdraw penalty, partial commitment pension with low withdraw penalty, partial commitment pension with high withdraw penalty, and a choice group in which they choose full commitment or partial commitment with high withdraw penalty. We find that, partial commitment pension with high withdraw penalty and the choice group have 9.9 percentage points and 7.7 percentage points more participation compared to full commitment pension, respectively. We show that high commitment contract attracts more sophisticated agents, and higher degree of commitment increase the pension participation more for sophisticated agents. These results are consistent with the theory of optimal illiquidity.
Christopher Tonetti
Stanford University
Sabrina T. Howell
New York University
Pascal Noel
University of Chicago
James Choi
Yale University
JEL Classifications
  • G2 - Financial Institutions and Services