The program for the CSEF-RCFS Conference on Finance, Labor, and Inequality is now available on the conference website. The conference will take place June 17-18, 2022, at the Mario Cacace Multimedia Center in Anacapri (Capri), Italy.
Nudges have long been recognized as devices that can influence individuals to take positive actions. Because they are relatively cheap to implement, effective nudges can be a useful policy tool. But can nudges lead to or even exacerbate differences in outcomes across different groups of people?
In “The Disparate Effect of Nudges on Minority Groups,” Maya Haran Rosen and Orly Sade explore this question in the context of the Savings for Every Child Program in Israel. Under this program, launched in 2017, for every child under eighteen the Israeli government deposits some money each month into a savings account. Parents can elect to save additional amounts for the child from their own finances and to make investment choices.
After the program was launched, text message nudges were sent to households drawn largely from two geographic areas. The authors find that, on the whole, the nudge was effective in inducing active participation from parents. However, the response from two minority groups in Israel, Arabs and Ultra-Orthodox Jews, was only half as large as from the general population. The authors show that the reasons for the lower response from the minority groups include lower digital literacy (specifically, less use of smartphones), weaker trust in the government, and lower financial literacy. However, even accounting for all these factors, there is a gap in the response from the minority groups, suggesting that unobserved cultural effects may also play a role. The overall message is that even well-intended policies that require target recipients to take an active step can sometimes generate disparities.
Spotlight by Uday Rajan
Photos courtesy of Maya Haran Rosen and Orly Sade
Today is the final day to register for SFS Cavalcade North America 2022 at UNC Chapel Hill! Please make sure you complete your registration today. The conference will begin Sunday, May 22.
The reasons that can explain the very important issue of gender disparities in labor market outcomes are still quite nebulous. To remove such disparities we need first to understand the sources of women’s differential labor market outcomes. Differences in human capital have been found lacking in explaining observed differences. Recent developments in the literature point to three potential factors: gender differences in preferences, structure of work that can differentially impact men versus women, and bias. Research on women’s labor outcomes typically only address one explanation at a time, resulting in very limited conclusions. Most of the differential outcomes arise within occupations rather than between occupations, calling for an investigation focused on one occupation.
These limitations are addressed by Renée Adams and Michelle Lowry in their paper “What’s Good for Women Is Good for Science: Evidence from the American Finance Association.” In this work, the authors investigate the importance of multiple factors simultaneously in explaining why females’ and males’ work experiences differ and cast in a within-occupation analyses. To do so, the authors develop a survey with the American Finance Association (AFA) to assess the professional culture in finance academia.
Focusing on within-occupation effects, the authors find no observable gender differences of significance in preferences. This is a surprising result because conventional narratives have always referred to this dimension as a potential explanation. Any preferences that may exist cannot explain women’s worse career experiences. There is an important role that institutions and policy can play in addressing gender discrimination: addressing poor individual experiences, and improving culture, for example by encouraging unconscious bias training. These findings within the academic environment have implications for the broader finance industry.
Spotlight by Andrew Ellul
Photos courtesy of Renée Adams and Michelle Lowry
Why do firms in the same industry often have different leverage levels? In their paper “Optimal Capital Structure with Imperfect Competition,” Egor Matveyev and Alexei Zhdanov show that strategic interaction alone can generate this difference. The authors first exhibit a theoretical model in which two ex ante identical firms are deciding when to enter an industry and also how much debt to issue. The product price depends both on the aggregate quantity and on a stochastic shock to the demand curve. In the overall equilibrium of the model, one firm (which becomes an incumbent) enters in a relatively low demand state with a correspondingly low amount of debt. The second firm, the new entrant, enters the industry in a high demand state, and with more debt than the incumbent. Thus, not only do ex ante identical firms in the industry have different leverage levels, but a sharper prediction emerges: Younger firms are more levered than older ones. As a result, younger firms are more likely to fall into financial distress. Further, the dispersion in leverage naturally relates to industry features such as cash flow volatility, tax rate, and bankruptcy costs. The authors then test these predictions on U.S. public firms. Indeed, as predicted by the model, leverage is negatively correlated with firm age, and firms that go bankrupt tend to be younger. To study leverage dispersion, they construct pairs of firms that are close rivals within each industry, and find that leverage dispersion is positively related to cash flow volatility, and negatively to tax rates and asset tangibility. Overall, the empirical results support the idea that strategic interaction is an important driver of differences in leverage.
Spotlight by Uday Rajan
Photos courtesy of Egor Matveyev and Alexei Zhdanov
First published February 4, 2022
Peer-to-peer (P2P) lending, directly matching borrowers and lenders without the presence of an intermediating bank or the need of deposits, has grown rapidly in many countries. This growth has placed in focus the competition between this new form of un-intermediated lending and the traditional intermediated bank lending. A series of questions regarding the competition between banks and P2P platforms arise: When do banks lose market share to P2P operators? What are the type of risk characteristics of loans that potentially move from traditional banks to P2P platforms? Are P2P platforms skimming the cream or bottom fishing for loans? Besides the quantity and type dimensions, what is the cost of capital of P2P loans: are P2P platforms lending at lower or higher risk-adjusted interest rates compared to banks? These questions become even more important when considering the regulatory dimension to which traditional banks are exposed. Calebe de Roure, Loriana Pelizzon, and Anjan V. Thakor investigate this questions in their paper “P2P Lenders versus Banks: Cream Skimming or Bottom Fishing?” First they present a theoretical model that can capture the competition between P2P and banks and then test it on data obtained from Auxmoney, the largest and oldest P2P lending platform for consumer credit in Germany, and from the Deutsche Bundesbank.
The paper documents that P2P and traditional bank loans are partial substitutes: lending increases, while total bank lending declines, when some banks are hit by higher regulatory costs in the form of higher capital requirements. The authors then find that Auxmoney charges higher loan interest rates than banks, but P2P borrowers are found to be riskier and less profitable than bank borrowers. This result is suggestive that P2P lenders are not skimming the cream but rather bottom fishing when they compete with banks. Relatedly, the paper finds that risk-adjusted interest rates are lower for P2P loans than for bank loans. There are two important implications from these results. First, P2P lending may expand through a bottom-fishing strategy that should have a positive social welfare effect by serving borrowers who have difficulty accessing bank loans. Second, the rise of P2P lending may lead to the banking sector shrinking and becoming less risky and possibly more profitable.
Spotlight by Andrew Ellul
Photos courtesy of Calebe de Roure, Loriana Pelizzon, and Anjan V. Thakor
The May issue of RCFS has published!
The Editor’s Choice paper is:
“P2P Lenders versus Banks: Cream Skimming or Bottom Fishing?”
Calebe de Roure, Loriana Pelizzon, and Anjan Thakor
RCFS Executive Editor Andrew Ellul will take part in the Publishing in Finance: Fireside Chats with Journal Editors webinar series on May 18 at 12pm ET. Sign up here.