The Role of Fiscal Policy, Peer Behaviour, and Financial Literacy SSD: SECS-P/06

Corso di Dottorato di ricerca in Economics ciclo 29° Tesi di Ricerca Household portfolios: the role of fiscal policy, peer behaviour, and financial literacy SSD: SECS-P/06 Coordinatore del Dottorato ch. prof. Giacomo Pasini Supervisore ch. prof. Mario Padula Co-Supervisore ch. prof. Giacomo Pasini Dottorando Anastasia Girshina Matricola 956103 HOUSEHOLD PORTFOLIOS: THE ROLE OF FISCAL POLICY, PEER BEHAVIOUR, AND FINANCIAL LITERACY Anastasia Girshina Ca' Foscari University of Venice Department of Economics December 2016 Abstract This thesis is a collection of three distinct essays that study the impact of iscal policy, peer behaviour and inancial literacy on household portfolio choices. Chapter 1 analyses the effects of iscal incentives to homeowners on the decision to acquire main resi- dence rather than renting it. Although many of the world's wealthy countries provide such incentives, their impact on housing tenure choice is unclear. Using difference-in-differences approach, this chapter estimates the effect of mortgage interest deduction on homeownership in the United States. The identiication relies on the large changes in income tax rates and standard deduction. The largest of these changes increased income tax rate by as much as 23.9% and decreased standard deduction by 7.2% between 2002 and 2004. The baseline estimates suggest that increase in income tax rate in a state that allows mortgage interest deduction is associated to 3 percentage points increase in homeownership relative to states that didn't change their iscal policy and to 5 percentage points - relative to states that do not allow mortgage interest deduction but had a comparable increase in tax rates. Increase in the proportion of itemizers through lower standard deductions also leads to higher homeownership rates in the treated states. The results are robust to a range of alternative speciications. Chapter 2 studies the role of peers' behaviour on investment choices. In particular, this essay analyses the inluence of immigrant investment behaviour on stock market participation of natives. To iden- tify the peer effect this study exploits the fact that roughly half of Luxembourg residents are foreign born and that immigrant groups are heterogeneous in terms of their inancial attitudes. The relec- tion problem is addressed by instrumenting immigrant stock ownership rates with the participation rates in their countries of origin. Contextual and correlated effects are separated from the endogenous peer effect by controlling for neighbourhood-speciic characteristics and individual risk preferences and inancial knowledge. The results show that peers' investment attitudes have sizeable effect on households' portfolio composition. Furthermore, this effect operates through both social learning, transmitted through more inancially literate individuals, and social utility channels. Finally, chapter 3 seeks to understand how differences in inancial literacy between women and men are related to the differences in their inancial wealth. By using Dutch Central Bank Household Sur- vey, this study shows that women are, on average, less knowledgeable about basic inancial concepts and that households whose inancial decisions are taken by women tend to have less inancial wealth. The results of the decomposition of the gender wealth differential suggest that 30% to 40% of the explained difference in women's and men's inancial wealth can be attributed to differences in their inancial literacy and that this portion increases along the wealth distribution. The results of this thesis contribute to designing evidence-based policy interventions. On the one hand, they show that households portfolio choices are sensitive to iscal incentives. On the other, they un- cover the importance of inancial literacy for long-term inancial wealth accumulation and the pres- ence of social multiplier of inancial knowledge, which has implications for the implementation of i- nancial education programmes. ii Contents Abstract ii List of Tables v List of Figures vii Acknowledgements vii Introduction 1 1 Implications of Fiscal Policy for Housing Tenure Decisions 5 1.1 Introduction ............................................ 6 1.2 U.S. Fiscal Policy and Homeownership Incentives ....................... 7 1.2.1 Controversy about mortgage interest deduction ................... 8 1.2.2 Previous Research .................................... 9 1.3 Methodology ............................................ 11 1.3.1 Theoretical Framework ................................. 11 1.3.2 Empirical Framework .................................. 14 1.4 Data, Sample Deinition and Descriptive Evidence ...................... 23 1.4.1 Individual Level Data ................................... 23 1.4.2 State Level Data ...................................... 26 1.5 The effect of Fiscal Policy on Homeownership ......................... 26 1.5.1 Estimates of the effect of MID on housing tenure decision using variation in income tax rates ....................................... 26 1.5.2 Estimates of the effect of MID on housing tenure decision using variation in standard deduction ...................................... 31 1.5.3 Interpreting the results ................................. 31 1.6 Robustness Analysis ........................................ 35 1.7 Conclusion ............................................. 35 1.8 Appendix .............................................. 36 1.8.1 Estimated models for the sample restricted to time period between 2004 and 2002 ............................................ 36 1.8.2 Theoretical Framework ................................. 37 1.8.3 Extension of the theoretical speciication for the case when mortgage interest payments are not fully deductible ........................... 38 1.8.4 Robustness Analysis ................................... 38 2 Peer effects in stock market participation: Evidence from immigration 57 iii 2.1 Introduction ............................................ 58 2.2 Previous research ......................................... 61 2.3 Background and study set-up: Luxembourg and immigrants ................ 64 2.4 Methodology and empirical strategy .............................. 65 2.4.1 Endogenous, contextual and correlated effects .................... 65 2.4.2 Identifying and estimating the peer effects: instrumental variable approach .. 67 2.4.3 Identifying mechanisms ................................. 71 2.5 Data, sample deinition and descriptive evidence ....................... 73 2.5.1 Individual level data ................................... 73 2.5.2 Commune level data ................................... 74 2.6 The effect of foreigners' stock market participation on the stock market participation of natives .............................................. 75 2.6.1 Main empirical results: OLS and two-stage least squares .............. 75 2.6.2 Robustness checks .................................... 77 2.7 Discussion and conclusions .................................... 80 2.8 Appendix .............................................. 104 2.8.1 Data treatment and Imputation ............................. 104 2.8.2 Analysis including social trust .............................. 107 3 Gender Differences in Wealth and the Role of Financial Literacy 113 3.1 Introduction ............................................ 114 3.2 Methodology ............................................ 116 3.2.1 Theoretical Framework ................................. 116 3.2.2 Empirical Framework .................................. 118 3.3 Data, Sample Deinition and Descriptive Evidence ...................... 120 3.4 Results ................................................ 126 3.4.1 Robustness ......................................... 135 3.5 Conclusion ............................................. 147 3.6 Appendix .............................................. 148 Conclusions 148 Bibliography 151 iv List of Tables 1.1 Summary statistics for the PSID sample, panels 2001 - 2011 ................ 24 1.2 Homeownership rates before and after the increase in income tax rates in New York and Pennsylvania .......................................... 27 1.3 OLS Regressions: increase in income tax in New York and Pennsylvania in 2004 vs 2002 29 1.4 OLS Regressions of homeownership: increase in income tax rates in New York State in 2004 vs 2002 ............................................ 30 1.5 Homeownership rates before and after the decrease in standard deduction in Oregon . 32 1.6 OLS Regressions of homeownership: decrease in standard deduction in Oregon in 2004 vs 2002 ............................................... 33 1.A Mortgage interest deduction and average tax rates by state ................. 40 1.B Standard deduction for single or separately iling couples by state, USD ......... 41 1.C Summary of Income Tax Rates by State ............................. 42 1.D Filed Federal Returns by State: Mortgage interest deduction ................ 48 1.E State level controls ......................................... 49 1.F Summary statistics for home- and mortgage-owners in the PSID sample, panels 2001 - 2011 ................................................. 50 1.G OLS Regressions of homeownership: increase in income tax in New York and Pennsyl- vania between 2000 and 2010 .................................. 51 1.H OLS Regressions of homeownership: changes in income tax rates in New York State between 2000 and 2010 ..................................... 52 1.I OLS Regressions of homeownership: decrease in standard

Load more