Dissertations

Thursday, 11 July, 2024

Marta Cota: Behavior and Complexity in Household Finance

Dissertation Committee:

Marek Kapička  (CERGE-EI, chair)

Veronika Selezneva (Paris Dauphine University)

Ctirad Slavík (CERGE-EI)

Defense Committee:

Michal Kejak (CERGE-EI, chair)

Sebastian Ottinger (CERGE-EI)

Marek Hudík (VŠE)

Referees:

Kathrin Schlafmann (Copenhagen Business School)

Fabrizio Mazzonna (Università della Svizzera italiana)

room 402

 Abstract:

This thesis explores mechanisms underlying differences in financial decision-making, including retirement saving and mortgage choice. Chapter 1 investigates the long-term effect of extrapolative expectations on retirement savings in subsidized employer-matched 401(k) accounts in the U.S. The chapter introduces a deviation from rational expectations in reproducing worker-level retirement contribution rates over their tenure. Chapter 2 generates a novel U.S. data set and examines the correlation between financial literacy, mortgage rate attainment, and refinancing. Empirical estimates motivate the introduction of financial literacy and the level of search effort as dimensions of heterogeneity that generate differences in mortgage repayments. I find that losses from low financial skill levels and search effort amount to almost 10 percent of the total loan, implying significant effects on the budgets of financially unskilled and inexperienced U.S. households. Chapter 3 leverages these empirical findings and embeds a micro-founded mortgage search framework in a standard heterogeneous agent model of consumption and saving. Financially skilled agents face lower cognitive search costs and thus explore more options, and ultimately achieve lower mortgage rates. Conditional on assets and productivity, consumption choices differ based on expected mortgage rate changes and mortgage uptake. The model quantifies the effects of financial education and mortgage accessibility and suggests that the effectiveness of financial education increases when mortgages are highly accessible. Chapters 2 and 3 underscore the importance of cost-effective access to financial planning information amidst the increased mortgage accessibility in the U.S.   

Full Text: "Behavior and Complexity in Household Finance"