David Broockman, University of California-Berkeley
Patrick Krause
Sarah Miller, University of Michigan
Eva Vivalt, University of Toronto
Abstract: We provide new evidence on the causal effect of unearned income on consumption, balance
sheets, and financial outcomes by exploiting an experiment that randomly assigned 1000 individ-
uals to receive $1000 per month and 2000 individuals to receive $50 per month for three years. The
transfer increased measured household expenditures by at least $300 per month. The spending im-
pact is positive in most categories, and is largest for housing, food, and car expenses. The treatment
increases housing unit and neighborhood mobility. We find noisily estimated modest positive ef-
fects on asset values, driven by financial assets, but these gains are offset by higher debt, resulting
in a near-zero effect on net worth. The transfer increased self-reported financial health and credit
scores but did not affect credit limits, delinquencies, utilization, bankruptcies, or foreclosures. Ad-
justing for underreporting, we estimate marginal propensities to consume non-durables between
0.44 and 0.55, durables and semi-durables between 0.21 and 0.26, and marginal propensities to
de-lever of near zero. These results suggest that large temporary transfers increase short-term con-
sumption and improve financial health but may not cause persistent improvements in the financial
position of young, low-income households.
Yigitcan Karabulut, Frankfurt School of Finance and Management gGmbH
Abstract: We provide evidence of a positive causal effect of increased financial literacy on portfolio returns and household wealth accumulation. Using admissions cutoffs that generate quasi-random variation in college-major choices, we show that studying business or economics causes individuals to invest significantly more in the stock market, earn higher portfolio returns, and ultimately accumulate higher levels of wealth later in life. Underlying these effects is the improved ability of individuals to acquire and process financial information and to make informed investment decisions. Early investments in financial literacy thus play an important role in generating higher returns that significantly alter individuals' life-cycle wealth profiles.
Abstract: Long-term (10-year horizon) subjective return expectations are much more important than near-term expectations in explaining stock market participation and risky share choices. The decision to trade or maintain equity allocation is more strongly related to levels and changes in long-term expectations than near-term expectations. Contrary to procyclical near-term expectations, long-term expectations are countercyclical consistent with rational expectations models of asset pricing. The procyclicality of near-term expectations is stronger for more financially sophisticated individuals while the countercyclicality of long-term expectations is more universal. The results have important implications for both theoretical and empirical household finance and asset pricing.
