Forthcoming, Journal of Political Economy
In settings with uncertainty, tension exists between ex ante and ex post notions of fairness (e.g., equal opportunity versus equal outcomes). In a laboratory experiment, the most common behavioral pattern is for subjects to select the ex ante fair alternative ex ante, and switch to the ex post fair alternative ex post. One potential explanation embraces consequentialism and construes the reversals as manifestations of time inconsistency. Another abandons consequentialism, thereby avoiding the implication that revisions imply inconsistency. We test between these explanations by examining the demand for commitment, and contingent planning. The hypothesis of time-consistent non-consequentialism receives strong support.
I design and implement a large scale field experiment in an economy that had been experiencing a decade-long debt-driven consumption boom, in which I construct a randomized credit line extension that isolates selection and interest rate effects, and track impulse responses using comprehensive data on spending and consumer balance sheets. I document substantial indirect effects of credit, and that the propensity to borrow and spend out of credit remains quantitatively large for those with substantial slack in borrowing capacity, as well as those with a sizable buffer of assets. I use data on the dynamics of the response and expenditure composition to distinguish two classes of potential explanations: one embracing precautionary savings in response to a credit constraint that may bind in the future; and the other invoking behavioral explanations based on myopia or dynamically inconsistent behavior. The reduced form findings provide strong support for a buffer-stock model emphasizing the importance of precautionary savings.
FIN 340: Capital Markets and Financial Management
FIN 600A: Field Experiments in Household Finance
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