The importance of business owners in assessing the size of precautionary savings (with E. Hurst, A. Lusardi, and A. Kennickell), Review of Economics and Statistics, February 2010, vol. 92, no. 1, 61-69. NBER version (2005).
Not properly accounting for differences between business owners and non business owners in studies of household wealth can lead to erroneous conclusions about the significance of different saving motives. Using data from the Panel Study of Income Dynamics from the 1980s and 1990s, we show that within samples of both business owners and non business owners, the amount of precautionary savings with respect to labor income risk is modest and accounts for less than ten percent of total household wealth. Previous large estimates of the size of precautionary balances resulted from pooling these two groups together. Such pooling is inappropriate given that business owners face higher labor risk and accumulate more wealth than non business owners for reasons unrelated to precautionary motives.
Bankruptcy law and consumption smoothing: an empirical investigation, July 2010.
This paper examines the effect of bankruptcy exemptions on consumption smoothing. Bankruptcy laws discharge borrowers who default on their debts, in exchange for relinquishing their assets. Chapter 7 of the U.S. Bankruptcy Code exempts some of the debtors’ assets from liquidation, with the amount of the exemption being determined at the state level. Those exemptions provide a crude form of insurance for households. Bankruptcy law, however, also limits the enforceability of debt contracts, as lenders may respond to higher exemptions by raising the price of debt or rationing credit. More expensive debt and outright borrowing constraints hamper households’ ability to use credit to smooth their consumption. In this paper we examine whether supply or demand effects dominate. Using PSID data from 1976 through 2003, we find that households that experience an involuntary job loss reduce their consumption more if they live in states with higher bankruptcy exemptions. The estimated effects of exemption levels are, however, small, from an economic point of view: the average reduction in food expenditures is approximately $109 per year, or $9 per month. Debt balances and the probability of having debt are lower in states with more generous exemptions. Asset holdings are lower in states with high exemptions, suggesting that the consumption smoothing result is driven by lack of self-insurance, not by less access to credit.
New evidence on the effects of sales taxes on retail activity, June 2003. Presented at the 2004 annual conference of the Southern Regional Science Association.
This paper examines the impact of the local option sales tax on volume of sales, number of establishments and level of employment in the retail industry of the counties and cities of the states of Ohio and Kansas. Unlike previous studies, I use instrumental variables to correct for the endogenous nature of the tax rate. The results suggest that the tax elasticity of retail activity may be larger than found so far in the literature.