Breaking the Commitment Device: The Effect of Home Equity Withdrawal on Consumption, Saving, and Welfare
Abstract/Contents
- Abstract
- Financial innovation and deregulation have given households an unprecedented ability to access home equity. To what extent is this beneficial? On one hand, access to home equity enables households to better smooth consumption and self-insure against risk. On the other hand, if housing acts as a savings commitment device, then more liquidity may weaken commitment. In this paper, we evaluate the costs and benefits of greater access to home equity by estimating a model that captures these two opposing channels. Model estimates are validated using a reform that abruptly legalized home equity withdrawal in Texas. In both the data and the model, we observe a 3% increase in nondurable consumption following the reform. According to our estimates, weakened commitment and consumption smoothing each account for half of the observed increase in consumption. Finally, we find that the cost of weakened commitment dominates and that welfare has declined due to the introduction of home equity withdrawal.
Description
Type of resource | text |
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Form | online resource |
Extent | 1 online resource |
Place | Stanford (Calif.) |
Publisher | Stanford Institute for Theoretical Economics |
Publication date | 2020 |
Language | English |
Digital origin | born digital |
Creators/Contributors
Author | Moran, Patrick | |
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Author | Kovac, Agnes | |
Speaker | Moran, Patrick |
Subjects
Subject | Housing |
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Subject | Mortgages |
Subject | Commitment |
Subject | Savings |
Subject | Liquidity |
Subject | Household finance |
Genre | Conference papers and proceedings |
Bibliographic information
Note | Presented at SITE on July 9, 2020 |
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Session series |
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Session |
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Location | https://purl.stanford.edu/xj155yq5030 |
Repository | Stanford Institute for Theoretical Economics |
Access conditions
- Use and reproduction
- This publication is open for research use. Copyright is retained by the author(s) or their heir(s).
Collection
Stanford Institute for Theoretical Economics (SITE) Archives
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