Knowledge that Transforms

Increasing personal bankruptcy protection raises consumers’ desire to borrow and lenders’ cost of extending credit; the impact on equilibrium borrowing is ambiguous. Using bankruptcy protection changes between 1999 and 2005 across U.S. states, we find that borrowers respond to greater protection by increasing their unsecured debt. Border county estimates suggest that local economic conditions do not drive these results. Borrowers pay more for protection through higher interest rates, yet delinquency is unaffected. Our results indicate that rising borrower demand outstripped decreasing supply. Increased protections did not reduce the aggregate level of household debt but affected the composition of borrowing.

Customers in over‐the‐counter (OTC) markets must find a counterparty to trade. Little is known about this process, however, because existing data consist of transaction records, which only reveal the outcome of a search. Using data from a trading platform for corporate bonds, we unpack the search process. We analyze how long it takes customers to trade and how dealers' offers evolve across repeated inquiries. We estimate that it takes two to three days to complete a transaction after an unsuccessful attempt, with substantial variation across trade and customer characteristics. Our analysis offers insights into the sources of trading delays in OTC markets.

We document that the source of funds for paying health insurance premiums has a dramatic impact on plan choices. We focus on the MediSave program in Singapore, a medical savings account that is used to pay out-of-pocket medical spending. Residents can also pay their health insurance premiums with cash or MediSave funds, but are subject to limits that vary by age and over time. By exploiting variations in those limits, we consistently find that when individuals are able to pay their health insurance premiums with MediSave funds, they are less price sensitive and more willing to enroll in more generous plans. We develop and estimate a mental accounting model which explains these patterns. We embed and reject alternative explanations such as hassle costs and liquidity constraints. We then extend this model and show that mental accounting can explain much, but not all, of the misweighting of premiums relative to out-of-pocket expenses in health insurance choice. We also find that allowing MediSave payment for both premiums and out-of-pocket expenses (e.g. putting them in the same mental account) enhances individual welfare and reduces adverse selection.

University access has significantly expanded in OECD countries, and further growth figures prominently in political agendas. We study possible consequences of historical and future expansions in a stochastic, general equilibrium Roy model where tertiary educational attainment is determined by cognitive ability and socioeconomic disadvantage. In our analysis, individual productivity depends not only on education but also directly on cognitive ability. The expansion of university access in the U.K. that started in the 1960s provides an ideal case study to draw lessons for the future. We find that this expansion led to the selection into college of progressively less talented students from advantaged backgrounds. Appropriate counterfactual policies existed that would have achieved the dual goal of increasing college graduates’ cognitive ability while improving tertiary education opportunities for the disadvantaged.