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Essays on Industrial Organization and Household Finance


In the thesis, I present my work that applies empirical methods to real-world problems in industrial organization and household finance. In the first chapter, I provide a framework to analyze the welfare impacts of insurance pricing and market structure in the U.S. mortgage market. The second chapter is joint work with Souphala Chomsisengphet. We study the equilibrium outcome of covenant restrictions on credit cards by the CARD Act.

The first chapter studies inefficiencies arising from the insurance pricing schedule of government-sponsored enterprises (GSEs) in the U.S. mortgage market, and how these inefficiencies interact with market structure and information asymmetry. I develop a vertical industry model of borrowers, lenders, and GSEs where lenders compete in originating mortgage loans and the GSEs provide mortgage insurance when facing default risks. The model is estimated using loan-level data on repayment and pricing decisions. The identification leverages a significant change to U.S. banking regulation that gives exogenous variation in credit supply. The estimation exploits a significant change to U.S. banking regulation that gives exogenous variation in credit supply. I find that GSE mortgage insurance pricing results in a redistribution from lower-risk borrowers to higher-risk borrowers and leads to a welfare loss, relative to a benchmark with full risk-based pricing. In my counterfactual analysis, I find that, under GSE pricing, a $50$ percent decrease in market concentration reduces welfare, while under full risk-based pricing, the same decrease in market concentration improves welfare. The results highlight that pricing, market structure, and information asymmetry in the mortgage market can have important interactions with one another.

The second chapter uses use the 2009 Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act), which prohibited penalty repricing on credit cards as the basis of a case study to understand the implications of covenant restrictions on lenders and borrowers. In the first part of the essay, we conduct an event study to examine the heterogeneous effects of penalty repricing among revolvers (high-risk borrowers) and transactors (low-risk borrowers). We find that penalty repricing has a larger impact on borrowers who face liquidity constraints in making credit card repayments. In the second part of the essay, to study the mechanism of competitive outcome changes following the pricing regulation of the CARD Act, we develop a model of borrowers and lenders on their repayment and pricing decisions. In the counterfactual analysis, regulating penalty repricing increases borrower surplus, social surplus, and (initial) interest rates. Imposing an interest rate ceiling decreases both borrower surplus and lender profit. The results highlight that, in credit contracts with dynamic risks, different forms of interest rate regulation, i.e., regulating penalty repricing and imposing a price ceiling, could yield different welfare impacts. In particular, it is important to consider the equilibrium effects on interest rates and credit supply when manipulating price dynamics.

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