Breaking the Commitment Device: The Effect of Home Equity Withdrawal on Consumption, Saving, and Welfare
- Type of resource
- Stanford (Calif.) : Stanford Institute for Theoretical Economics, 2020
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Since 1989, Stanford University's Department of Economics has hosted a series of workshop sessions in economic theory and mathematical economics. This program is known as the Stanford Institute for Theoretical Economics (SITE). Its purpose is to advance economic science for the benefit of society and to support cutting-edge work of economic theorists within specialized areas of research. The SITE Archives documents the workshop proceedings over time. Access to the presented papers is available in cases where the original material was provided by the author(s). This portion of the archive includes records describing papers where a copy of the original material is preserved and accessible.
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Financial innovation and deregulation have given households an unprecedented ability to access home equity. To what extent is this beneficial? On one hand, access to home equity enables households to better smooth consumption and self-insure against risk. On the other hand, if housing acts as a savings commitment device, then more liquidity may weaken commitment. In this paper, we evaluate the costs and benefits of greater access to home equity by estimating a model that captures these two opposing channels. Model estimates are validated using a reform that abruptly legalized home equity withdrawal in Texas. In both the data and the model, we observe a 3% increase in nondurable consumption following the reform. According to our estimates, weakened commitment and consumption smoothing each account for half of the observed increase in consumption. Finally, we find that the cost of weakened commitment dominates and that welfare has declined due to the introduction of home equity withdrawal.
- Presented at SITE on July 9, 2020
- Session series
- Empirical Implementation of Theoretical Models of Strategic Interactions and Dynamic Behavior
- Organizer of meeting:
- Puller, Steven, Wolak, Frank
- The papers for this session are invited from the fields of empirical Industrial Organization (IO), Labor Economics, Public Finance, and Health Economics, Environmental and Energy Economics, and Development Economics. The unifying feature of the papers should be that they each contain a theoretical model of an economic interaction and an empirical implementation of this theoretical model using actual data. Popular topics for papers from previous years—the empirical implementation of models of auction market equilibrium, discrete choice models of differentiated product demand and oligopoly equilibrium, dynamic models of individual and group behavior, and analysis of experiment data of policy interventions in circumstances of non-random assignment or self-selection. A clear link between the theoretical economic model and econometric model should be a hallmark of the papers presented.
- Stanford Institute for Theoretical Economics
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