Essays in Finance and Environmental Economics
This dissertation is comprised of three chapters, each of which contributes to the field of behavioral finance. Two of the chapters focus on topics in environmental economics and the third on U.S. household finance. All of the papers analyze the incentives and behavior of individuals (or firms in the case of the first chapter) to provide insight into macro phenomena.
"The Effects of Carbon Markets on Equity Prices and Volatility" uses a firm-level dataset of carbon assets and liabilities between 2005 and 2007 to examine the impact of volatile carbon prices on equity prices. I find that the changes to firms' market capitalizations during a period of falling carbon prices are explained by the change in the net present value of emission permit holdings. Equity prices respond to changes in the mark-to-market value of firms' carbon permit shortfalls or surpluses and carbon price volatility increases the volatility of equity prices. I also document considerable delays in the equity and options markets responses to developments in carbon markets and attribute these lagged responses to information constraints and the novelty of carbon markets.
"Outstanding Debt and the Household Portfolio," co-written with my classmate Reza Shabani, alters a simple portfolio choice model to allow households to retire outstanding debt and realize a risk-free rate of return equal to the interest rate on that debt. Using the Survey of Consumer Finances we find that households with mortgage debt are 10 percent less likely to own stocks and 37 percent less likely to own bonds compared to similar households with no outstanding mortgage debt. To show that our results are not driven by irrational behavior amongst a subset of households, we construct two proxy variables for financial naivete. Finally we calculate the costs of non-optimal investment decisions in the presence of various forms of household debt including mortgages, home equity loans and credit card debt. We find that 26 percent of households should forego equity market participation on account of the high interest rates that they pay on their debt.
"Crude Drilling: An Analysis of Incentives and Behavior in the Oil Industry During the 1860s" explains why rates of oil extraction in the nascent oil industry far exceeded the profit maximizing levels predicted by the economic theory of non-renewable resources. The analysis combines historical narrative accounts with property sale and lease data and information on oil well owners to explain how individual incentives led to aggregate over-drilling. In particular, I focus on the incentives of under-capitalized wildcat drillers as an explanation for the excessive waste and under-investment that characterized the early oil market. I find that these poorer prospectors were incentivized to extract oil at higher than optimal rates because of the characteristics of their property lease contracts and the low-cost drilling technology they used to bore exploratory wells. Low barriers to entry in the early oil drilling business led to an influx of wildcat drillers into the nascent oil market and delayed the entry of additional well-capitalized drillers. The result was a market characterized by cyclical supply shocks, low levels of investment in storage and conservation, and corresponding price instability.