Igor Livshits | Federal Reserve Bank of Philadelphia (original) (raw)

Papers by Igor Livshits

National Bureau of Economic Research, 2008

This paper explores the implications of technological progress in consumer lending. The model fea... more This paper explores the implications of technological progress in consumer lending. The model features households whose endowment risk is private information, and intermediaries which observe a noisy signal of each borrower's default risks. To offer a lending contract, an intermediary incurs a fixed cost. Each lending contract is comprised of an interest rate, a borrowing limit and a set of eligible borrowers. Technological improvements which lead to more accurate signals of a borrowers type or lower the cost of offering a contract increase the number of contracts offered and lead to the extension of credit to riskier households. This results in higher aggregate levels of defaults and borrowing. To corroborate the predictions of the model, we examine data on credit card borrowing reported by households in the Survey of Consumer Finance. We find that the number of different credit card interest rates reported (one measure of the "number" of contracts) has increased, that the empirical density of credit card interest rates has become much more disperse and lower income households' share of outstanding credit card debt has increased since 1983.

Working paper, Feb 1, 2023

Lowering a borrower's interest rate is one of the most effective ways to reduce a borrower's debt... more Lowering a borrower's interest rate is one of the most effective ways to reduce a borrower's debt burden. Mortgage refinancing offers a chance to shift debt balances from high-interest loans into a low-interest mortgage through "cashing out" some of the home's equity. Borrowers could reduce their monthly payments by up to 13 percent by folding a student loan with a 6 percent interest rate into a mortgage with a 3 percent interest rate. Using anonymized data on mortgage refinancing behavior, we find that over half of borrowers with high-interest loans and available home equity do not take advantage of their cash-out opportunities. Strikingly, this pattern is seen among borrowers who have already chosen to refinance their mortgage, thereby overcoming inertia, information frictions, and large fixed costs associated with the decision to refinance. Furthermore, even when the last remaining fixed cost (cash-out surcharge) is eliminated for student-loan borrowers by a policy change at Fannie Mae, we find that the presence of a student loan does not significantly affect borrowers' propensity to cash out after these surcharges are eliminated.

American Economic Journal: Macroeconomics, Apr 1, 2010

Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thous... more Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, the rise in filings appears to mainly reflect changes in the credit market environment. We find that credit market innovations which cause a decrease in the transactions cost of lending and a decline in the cost of bankruptcy can largely accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.

RePEc: Research Papers in Economics, 2013

We propose a parsimonious model with adverse selection where delinquency, renegotiation, and bank... more We propose a parsimonious model with adverse selection where delinquency, renegotiation, and bankruptcy all occur in equilibrium as a result of a simple screening mechanism. A borrower has private information about her cost of bankruptcy, and a lender may use random contracts to screen different types of borrowers. In equilibrium, some borrowers choose not to repay, and thus become delinquent. The lender renegotiates with some delinquent borrowers. In the absence of renegotiation, delinquency leads to bankruptcy. We apply the model to analyze effects of a government intervention in debt restructuring. We show that a mortgage modification program aimed at limiting foreclosures that fails to take into account private debt restructuring may have the opposite effect from the one intended.

Working paper (Federal Reserve Bank of Philadelphia)

The American Economic Review, Mar 1, 2007

American consumer bankruptcy provides for a Fresh Start through the discharge of a household's de... more American consumer bankruptcy provides for a Fresh Start through the discharge of a household's debt. Until recently, many European countries specified a No Fresh Start policy of lifelong liability for debt. The trade-off between these two policies is that while Fresh Start provides insurance across states, it drives up interest rates and thereby makes life-cycle smoothing more difficult. This paper quantitatively compares these bankruptcy rules using a life-cycle model with incomplete markets calibrated to the U.S. and Germany. A key innovation is that households face idiosyncratic uncertainty about their net asset holdings (expense shocks) and labor income. We find that expense uncertainty plays a key role in evaluating consumer bankruptcy laws.

Working paper (Federal Reserve Bank of Philadelphia)

The political process in the United States appears to be highly polarized: Data show that the pol... more The political process in the United States appears to be highly polarized: Data show that the political positions of legislators have diverged substantially, while the largest campaign contributions come from the most extreme donor groups and are directed to the most extreme candidates. Is the rise in campaign contributions the cause of the growing political polarization? In this paper, we show that, in standard models of campaign contributions and electoral competition, a free-rider problem among potential contributors leads naturally to polarization of campaign contributors but without any polarization in candidates' policy positions. However, we go on to show that a modest departure from standard assumptions-allowing candidates to directly value campaign contributions (because of "ego rents" or because lax auditing allows them to misappropriate some of these funds)-delivers the ability of campaign contributions to cause policy divergence. Consistent with the model, we document that a candidate's share of contributions in U.S. House of Representatives races is higher when her opponent's agenda is more extreme.

Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thous... more Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households’ earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.

A key feature of recent work on barriers to technology adoption is the assumption that monopoly r... more A key feature of recent work on barriers to technology adoption is the assumption that monopoly rights of insiders are limited by the ability of industry outsiders to enter. This paper endogenizes the decision of a government to provide barriers to technology adoption alone or in combination with barriers to entry of outsiders. Using a political economy model, we find that a government provides barriers to both technology adoption and outsider entry. If governments are not too "corrupt", restricting their ability to provide barriers to entry may eliminate barriers to adoption. However, for sufficiently "corrupt" governments, prohibiting barriers to entry leads to more extreme barriers to technology adoption. JEL Codes: O4, F43, D72.

This paper studies the choice between general and speciflc human capital. A trade-ofi arises beca... more This paper studies the choice between general and speciflc human capital. A trade-ofi arises because general human capital, while less productive, can easily be reallocated across flrms. Accordingly, the fraction of individuals with speciflc human capital depends on the amount of uncertainty in the economy. Our model implies that while economies with more speciflc human capital tend to be more productive, they also tend to be more vulnerable to turbulence. As such, our theory sheds some light on the experience of Japan, where human capital is notoriously speciflc: while Japan beneflted from this predominately speciflc labor force in tranquil times, this speciflcity may also have been at the heart of its prolonged stagnation.

This paper models credit histories as a way of aggregating information among various potential le... more This paper models credit histories as a way of aggregating information among various potential lenders, and is the first one to explicitly model how borrowers may affect this information aggregation through sequential borrowing. We analyze a dynamic economy with multiple competing lenders, who have heterogeneous private information about a consumer’s creditworthiness. We explore how this private information is aggregated through lending that take place over multiple stages. There are two key forces at play. On the one hand, acquiring a loan at an early stage serves as a positive signal—it allows the borrower to convey to other lenders the existence of a positively informed lender (advancing that early loan)—thereby convincing other lenders to extend further credit in future stages. On the other hand, because further lending dilutes existing loans (by increasing the consumer’s probability of default), the early lender takes this into account by charging a higher interest rate on the ...

This paper offers a simple theory of inefficiently lax financial regulation arising as an outcome... more This paper offers a simple theory of inefficiently lax financial regulation arising as an outcome of a democratic political process. Lax financial regulation encourages some banks to issue risky residential mortgages. In the event of an adverse aggregate housing shock, these banks fail. When banks do not fully internalize the losses from such failure (due to limited liability), they offer mortgages at less than actuarially fair interest rates. This opens the door to home ownership for young, low net-worth individuals. In turn, the additional demand from these new home-buyers drives up house prices. This leads to a non-trivial distribution of gains and losses from lax regulation among households. On the one hand, renters and individuals with large non-housing wealth suffer from the fragility of the banking system. On the other hand, some young, low net-worth households are able to get a mortgage and buy a house, and current (old) home-owners benefit from the increase in the price of their houses. When these latter two groups, who benefit from the lax regulation, constitute a majority of the voting population, then regulatory failure can be an outcome of the democratic political process.

Consumer bankruptcy provides partial insurance against bad luck, but, by driving up interest rate... more Consumer bankruptcy provides partial insurance against bad luck, but, by driving up interest rates, makes life-cycle smoothing more difficult. We argue that to assess this trade-off one needs a quantitative model of consumer bankruptcy with three key features: life-cycle component, idiosyncratic earnings uncertainty, and expense uncertainty (exogenous negative shocks to household balance sheets). We find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules. More persistent shocks make the bankruptcy option more desirable. Larger transitory shocks have the opposite effect. Our findings suggest the current US bankruptcy system may be desirable for reasonable parameter values. (JEL D14, D91, K35)

Several recent defaults on sovereign debt were accompanied by major bank-ing crises in the defaul... more Several recent defaults on sovereign debt were accompanied by major bank-ing crises in the defaulting countries. I argue that the banking crises, triggered by the defaults, were due to inadequate prudential regulations, which did not recognize the riskiness of the government debt. I use a simple model of pruden-tial regulation to illustrate this point. I further show that the failure to adjust prudential regulation can be a conscious decision of the government, rather than an oversight. When risky government debt is considered safe by the regulation, domestic banks gamble by constructing portfolios correlated with government default. These banks bid up the price of the government bonds, which lowers government’s cost of borrowing and may postpone (and give a chance to avoid) the default. I provide supporting evidence from the Russian 1998 crisis.

Working paper (Federal Reserve Bank of Philadelphia), 2022

Several recent defaults on sovereign debt were accompanied by major banking crises in the default... more Several recent defaults on sovereign debt were accompanied by major banking crises in the defaulting countries. I argue that the banking crises, triggered by the defaults, were due to inadequate prudential regulations, which did not recognize the riskiness of the government debt. I use a simple model of prudential regulation to illustrate this point. I further show that the failure to adjust prudential regulation can be a conscious decision of the government, rather than an oversight. When risky government debt is considered safe by the regulation, domestic banks gamble by constructing portfolios correlated with government default. These banks bid up the price of the government bonds, which lowers government’s cost of borrowing and may postpone (and give a chance to avoid) the default. I provide supporting evidence from the Russian 1998 crisis.

Loose financial regulation encourages some banks to adopt a risky strategy of specializing in res... more Loose financial regulation encourages some banks to adopt a risky strategy of specializing in residential mortgages. In the event of an adverse aggregate housing shock, these banks fail. When banks do not fully internalize the losses from such failure (due to limited liability or deposit insurance), they offer mortgages at less than actuarially fair interest rates. This opens a door to home-ownership for some young low net-worth individuals. In turn, the additional demand from these new home-buyers drives up house prices. All of this leads to non-trivial distribution of gains and losses from lax regulation amongst the households. Renters and individuals with large non-housing wealth suffer from the fragility of the banking system induced by the lax regulation. On the other hand, some young middle-income households are able to get a mortgage and buy a house, thus benefiting from the lax regulation. Furthermore, the current (old) homeowners benefit from the increase in the price of th...

Federal Reserve Bank of Philadelphia Working Paper Series, 2019

Banking regulation routinely designates some assets as safe and thus does not require banks to ho... more Banking regulation routinely designates some assets as safe and thus does not require banks to hold any additional capital to protect against losses from these assets. A typical such safe asset is domestic government debt. There are numerous examples of banking regulation treating domestic government bonds as ?safe,? even when there is clear risk of default on these bonds. We show, in a parsimonious model, that this failure to recognize the riskiness of government debt allows (and induces) domestic banks to ?gamble? with depositors? funds by purchasing risky government bonds (and assets closely correlated with them). A sovereign default in this environment then results in a banking crisis. Critically, we show that permitting banks to gamble this way lowers the cost of borrowing for the government. Thus, if the borrower and the regulator are the same entity (the government), that entity has an incentive to ignore the riskiness of the sovereign bonds. We present empirical evidence in ...

National Bureau of Economic Research, 2008

Working paper, Feb 1, 2023

American Economic Journal: Macroeconomics, Apr 1, 2010

RePEc: Research Papers in Economics, 2013

Working paper (Federal Reserve Bank of Philadelphia)

The American Economic Review, Mar 1, 2007

Working paper (Federal Reserve Bank of Philadelphia)

Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thous... more Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households’ earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.

Working paper (Federal Reserve Bank of Philadelphia), 2022

Federal Reserve Bank of Philadelphia Working Paper Series, 2019