This dissertation explores the relationship between finance and welfare, focusing on how the expansion of credit supply in the beginning of the 2000s, leading to the 2007 financial crisis, affected U.S. households. This dissertation helps advance the study of how financial policies affect households' well- being.

In the first chapter, I study the effect of access to credit on family structure. There is a large debate over the welfare effects of the early 2000s housing boom and bust. One potentially important welfare effect is the impact of mortgage credit expansion on family structure. Exploiting pre-housing boom variation on the distribution of old homeowners who live alone and are older than 65, I conduct within-county analysis with zip code level data to causally identify the effect of access to credit on fertility outcomes through a channel associated with a more efficient reallocation of the existing housing stock among households. I examine two other housing channels, house wealth gains and new construction, and show that the most relevant channel is the reallocation, which allows young households to access space by either moving to larger homes or achieving homeownership earlier in their life-cycle. A one standard deviation increase in reallocation leads to a 6.4% increase in fertility from 2000 to 2006. The same increase in house prices leads to only a 2.7% increase, and in new construction leads to a 1.5% decline in fertility from 2000 to 2006. I estimate that approximately 500,000 babies were born between 2000 and 2006 because of the reallocation channel.

In the second chapter, I study the effect of housing demand on house prices through an interest rate channel. In the last housing boom, strong house price growth only lasted until 2005. Why did house price growth slowed down in 2006? This chapter studies the effect of interest rate changes on housing demand at the end of a housing boom and the subsequent effect on house prices. I use three different proxies for housing demand, based on Google search data on search terms likely to be used during the process of purchasing a home, such as "remax", "construction", or "real estate". A one- standard deviation increase in the change in interest in purchasing a home from 2005 to 2006, measured by the Google search volume, leads to a 0.4 standard deviation increase in contemporaneous house price growth. To identify the interest rate channel, I first compute a household income threshold for each county, defined as the necessary income to afford an interest-rate-only mortgage on a county's average loan in 2005. I then exploit the slope of the county's income distribution around this affordability threshold to estimate the fraction of households that, after an increase in mortgage interest rates from 2005 to 2006, could no longer afford to pay an interest-rate-only mort- gage. I use this fraction as an instrumental variable for housing demand. The IV beta is remarkably close to the OLS beta, and confirms the large effect of housing demand on house prices in 2006 through an interest rate channel. This chapter sheds light on the transition process between the housing boom in the 2000s and the subsequent financial crisis, and contributes to a better understanding of the impact of monetary policy on housing demand and house prices at the end of a housing boom.

The 1964 Securities Acts Amendments extended the mandatory disclosure requirements that had applied to listed firms since 1934 to large firms traded Over-the-Counter (OTC). We find several pieces of evidence indicating that investors valued these disclosure requirements, two of which are particularly striking. First, a firm-level event study reveals that the OTC firms most affected by the 1964 Amendments had abnormal excess returns of about 3.5 percent in the weeks immediately surrounding the announcement that they had begun to comply with the new requirements. Second, we estimate that the most affected OTC firms had abnormal excess returns ranging between 11.5 and 22.1 percent in the period between when the legislation was initially proposed and when it went into force. These returns are adjusted for the standard four factors and are relative to NYSE/AMEX firms, matched on size and book-to-market equity, that were unaffected by the legislation. While we cannot determine how much of shareholders' gains were a transfer from insiders of these same companies, our results suggest that mandatory disclosure causes managers to focus more narrowly on maximizing shareholder value.

This dissertation consists of three chapters spanning two areas of finance: corporate finance and asset management. A unifying theme across all chapters is the identification of issues that calls for the action of policymakers in order to improve the conditions of the less empowered, with a special focus on two themes: (1) factors affecting small entrepreneurs in the main street, and (2) agency and transparency problems underlying the management of small investors' wealth. Understanding these issues – and how to mitigate them – is of fundamental importance for regulations and policies aiming at the reduction of income and wealth inequality. I quantify the economic losses generated by (i) the underperformance of funds subject to agency problems, and by (ii) the business underactivity in low-income regions, carefully measuring the benefits of actual and hypothetical interventions by policymakers.

In the first chapter, "Crime Rates, Law Enforcement, and Business Activity", I ask if regions with prevalent violent and property crimes can promote business activity by reducing crime rates with more law enforcement. A short-term increase in the police force leads to a reduction in crime rates and an increase in the total sales of the retail sector. Surprisingly, the economic gains stemming from the reduction in murders is similar to the additional value added by the retail sector, highlighting the importance of accounting for business activity in the law enforcement cost-benefit analysis.

This causal effect from crime rates to business activity, taken together with the finding of the crime literature that increased business activity leads to fewer crimes, implies a feedback between crime and business, which suggests the existence of multiple Pareto-ranked equilibria. I provide evidence that strong – yet temporary – police shocks can create a permanent reduction in crime and a permanent increase in entrepreneurship, consistent with a shift away from the undesirable equilibria. The findings highlight how crime prevention law enforcement could be used as a tool to achieve economic development for economies stuck in a perverse poverty trap equilibrium with high-crime and low-business-activity.

In the second chapter, "Outraged by Compensation: Implications for Public Pension Performance", based on joint work with Adair Morse and Alexander Dyck, we analyze the frictions in optimal contracting emerging from board members' sensitivity to employee and public outrage over high management compensation. We show that relaxing outrage constraints results in substantial incremental value added. The case highlights the importance of governance structures that insulates boards from external political pressures in state pension funds.

In the third chapter, "Mutual Fund Portfolios: The Case of the Missing Value Funds", based on joint work with Martin Lettau and Sydney Ludvigson, we assess the portfolios of active mutual funds and ETFs from the lens of risk (anomaly) factors that have been identified by the asset pricing literature. Our main finding is that mutual funds' portfolios are highly concentrated in growth stocks. Surprisingly, this is true even for funds that advertise themselves as value-oriented. This finding is of great importance for the evaluation of the transparency of the investment strategies in this industry, given that non-sector funds are usually classified in the ``square'' composed by the four combinations of small cap/ large cap and value/growth. We conclude that U.S. retail investors cannot trust the official labels of mutual funds and ETFs.