Do Banks Pass Through Credit Expansions? The Marginal Profitability of Consumer Lending During the Great Recession

From Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney, and Johannes Stroebel:

The effect of bank-mediated stimulus on household borrowing depends on whether banks pass through credit expansions to households with a high marginal propensity to borrow (MPB). We use panel data on 14.2 million U.S. credit card accounts and 812 credit limit regression disconti- nuities to estimate the MPB for households with different FICO credit scores. We find substantial heterogeneity, with a $1 increase in credit limits raising total unsecured borrowing after 12 months by 58 cents for consumers with the lowest FICO scores (≤660) while having no effect on total bor- rowing by consumers with the highest FICO scores (> 740). We use the same credit limit regression discontinuities to estimate banks’ marginal propensity to lend out of a decrease in their cost of funds. For the lowest FICO score households, higher credit limits quickly reduce marginal profits, limiting the pass-through of credit expansions to those households. We estimate that a 1 percentage point reduction in the cost of funds raises optimal credit limits by $135 for consumers with FICO scores below 660 versus $1,478 for consumers with FICO scores above 740. We conclude that banks have the least incentive to pass through credit expansions to households that want to borrow the most and discuss the implications for bank-mediated stimulus.

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The Rise of Domestic Outsourcing and the Evolution of the German Wage Structure

From Deborah Goldschmidt and Johannes Schmieder:

The nature of the relationship between employers and employees has been changing over the last decades, with firms increasingly relying on contractors, temp agencies and franchises rather than hiring employees directly. We investigate the impact of this transformation on the wage structure by following jobs that are moved outside of the boundary of lead employers to contracting firms. For this end we develop a new method for identifying outsourcing of food, cleaning, security and logistics services in administrative data using the universe of social security records in Germany. We document a dramatic growth of domestic outsourcing in Germany since the early 1990s. Event-study analyses show that wages in outsourced jobs fall by approximately 10-15% relative to similar jobs that are not outsourced. We find evidence that the wage losses associated with outsourcing stem from a loss of firm-specific rents, suggesting that labor cost savings are an important reason why firms choose to contract out these services. Finally, we tie the increase in outsourcing activity to broader changes in the German wage structure, in particular showing that outsourcing accounts for around 10 percent of the increase in German wage inequality since the 1980s.

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Local Elections in America Project: “a digital archive of past election results”

Here is their website. From a quick glance, it seems to have election data since 1970 for most if not all elected offices ranging from local to federal offices. Awesome.


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Evaluating Public Programs with Close Substitutes: The Case of Head Start

From Pat Kline and Chris Walters:

This paper empirically evaluates the cost-effectiveness of Head Start, the largest early- childhood education program in the United States. Using data from the Head Start Impact Study (HSIS), we show that Head Start draws roughly a third of its participants from competing preschool programs that receive public funds. This both attenuates measured experimental impacts on test scores and reduces the program’s net budgetary costs. A calibration exercise indicates that accounting for the public savings associated with reduced enrollment in other subsidized preschools substantially increases estimates of Head Start’s rate of return, defined as the after-tax lifetime earnings generated by an extra dollar of public spending. Estimates of a semi-parametric selection model reveal substantial heterogeneity in Head Start’s test score im- pacts with respect to counterfactual care alternatives as well as observed and unobserved child characteristics. Head Start is about as effective at raising test scores as competing preschools and its impacts are greatest on children from families unlikely to participate in the program. Expanding Head Start to new populations is therefore likely to boost the program’s rate of return, provided that the proposed technology for increasing enrollment is not too costly.

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Improving Opportunities for Economic Mobility: New Evidence and Policy Lessons

Here’s a link to Raj Chetty’s recent presentation at Booth on the American Dream.

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Great to see research of my colleagues in today’s NYTimes

The Economics of Suspense

College for the Masses

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What do leading economists think about Local Tax Incentives?

Screenshot 2015-03-24 17.03.23

See more here

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