BETWEEN SCYLLA AND CHARYBDIS: INCOME DISTRIBUTION,CONSUMER CREDIT,AND BUSINESS CYCLES

We introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios. Growing inequality produces debt‐led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend. Instead, when inequality rises but the banking sector is highly regulated, aggregate demand and output fall. Our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy: acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy. (JEL C63, D31, E62, G01)     

DIFFERENTIAL DEPOSIT GUARANTEES AND THE EFFECT OF MONETARY POLICY ON BANK LENDING

This paper utilizes differences in de jure deposit insurance coverage across banks and changes in coverage over time to identify a bank‐lending channel in Poland. Banks with partial guarantees have a stronger loan response to monetary policy than banks with full guarantees. Furthermore, the weak response of the fully guaranteed banks is attributed to their ability to raise low‐reserve, uninsured time deposits relative to the partially covered banks. When differential coverage is eliminated, there is no disparity in the loan response between the two groups. This lending channel has implications for credit control and financial system development in emerging markets. (JEL E52, G21, G28)     

BENIGN NEGLECT OF COVENANT VIOLATIONS: BLISSFUL BANKING OR IGNORANT MONITORING?

Theoretically, bank's loan monitoring activity hinges critically on its capitalization. To proxy for monitoring intensity, we use changes in borrowers' investment following loan covenant violations, when creditors can intervene in the governance of the firm. Exploiting granular bank‐firm relationships observed in the syndicated loan market, we document substantial heterogeneity in monitoring across banks and through time. Better capitalized banks are more lenient monitors that intervene less with covenant violators. Importantly, this hands‐off approach is associated with improved borrowers' performance. Beyond enhancing financial resilience, regulation that requires banks to hold more capital may thus also mitigate the tightening of credit terms when firms experience shocks. (JEL G21, G32, G33, G34)     

THE CREDIT‐CHANNEL TRANSMISSION MECHANISM AND THE NONLINEAR GROWTH AND WELFARE EFFECTS OF INFLATION AND TAXES

With the credit‐channel effect driven by the central bank's open market operations, this paper's model easily gives rise to the nonlinear inflation‐growth nexus, which is evidenced by a number of cross‐country empirical studies. The threshold level of the inflation rate is found to be lower when tax rates are higher. The presence of the credit‐channel effect also provides the rationale for setting positive (and smaller than 1) tax rates on consumption, labor income, and capital income. The optimal tax rates rise as the inflation target declines. Under a fiscal policy rule where labor and capital income taxes move proportionally to each other, the optimal capital income tax rate could be higher than the optimal labor income tax rate. Under a sufficiently large central bank balance sheet, the credit‐channel effect will be so weak that inflation and all kinds of taxes are growth and welfare repressing. This provides a rationale for central banks that have implemented quantitative easing policies to shrink their balance sheets. (JEL E58, E62, O42)     

COMMODITY PRICES AND BANK LENDING

We analyze the transmission of changes in commodity prices to bank lending in a large sample of developing countries. A bank-level analysis shows that a fall in commodity net export prices is associated with a reduction of bank lending, particularly for commodity exporters and during episodes of terms-of-trade decline. We complement this analysis with loan-level data from a credit register, which allows us to identify the effect of a commodity price shock on the supply of credit, controlling for unobserved factors that could drive borrowers' credit demand. Results show that banks with relatively lower deposits and poor asset quality transmit the changes in commodity prices to lending more aggressively. (JEL F30, F34, G21, Q02)     

FINANCE-INEQUALITY NEXUS: THE LONG AND THE SHORT OF IT

Financial development affects income inequality differently in the short and in the long term. Investigating OECD countries from 1870–2011, we find in the short run, an improvement in financial development tends to reduce inequality, while in the long run, more finance contributes to more inequality. The short-run effect concurs with theories advocating financial development increases the availability of financial services, primarily for the poor. However, this effect becomes nil within a few years. Results thus imply that policies aimed at reducing inequality through improving access of the poor to finance need to be carefully designed to ensure longevity of impact. (JEL O15, O16, D31, G20, E44)     

PIECE‐RATE CONTRACTS FOR OTHER‐REGARDING WORKERS

When workers are paid with piece rates, inequality arises naturally. We consider workers who care about income comparisons and are either status seeking or inequality averse. We identify circumstances under which inequality attitudes lead workers to exert more effort than they would otherwise, and also circumstances under which workers’ inequality attitudes lead firms to set lower piece rates than they would otherwise. The key behavioral assumption for both of these results to hold when workers are identical is behindness aversion, the property that changes in inequality matter more to the worker when he is behind than when he is ahead. (JEL D01, J33, M52)     

WHY DO PEOPLE USE DEBIT CARDS: EVIDENCE FROM CHECKING ACCOUNTS

Debit cards are the fastest growing consumer payment method despite being more expensive and less versatile than credit cards. In this paper, we investigate some of the oft cited explanations for debit card use. Checking account data shows that debit card use is correlated with age, pay frequency, overdrafting, and ATM use, but not income, gender, crime, or expenditure. The data contain some signs that debit cards might be used as a method of spending restraint. (JEL D14, G21, L14)     

ON INTERGENERATIONAL IMMOBILITY: EVIDENCE THAT ADULT CREDIT HEALTH REFLECTS THE CHILDHOOD ENVIRONMENT

We examine the persistence of inequality through credit health, linking administrative records from several sources. We document that childhood circumstances are strongly predictive of financial fragility in adulthood, with credit scores among those from disadvantaged backgrounds nearly 100 points lower and 20 percentage points more likely to qualify as subprime. We find evidence this relationship reflects differences in human capital and debt management; still, neither appears to fully explain the relationship. Our results reveal another dimension along which childhood circumstances persist into adulthood and could mean the many settings that evaluate individuals based on their credit health help reinforce inequities.(JEL D12, E24, I32)     

THE GREAT OVERESTIMATION: TAX DATA AND INEQUALITY MEASUREMENTS IN THE UNITED STATES, 1913–1943

Historical measures of income inequality in the United States must grapple with the challenge of data quality. We examine one such problem affecting the well-known estimates of income inequality produced by Piketty and Saez (2003) using the records of the Internal Revenue Service (IRS). Prior to 1943, incomes were self-reported. Combined with lax enforcement on the part of the IRS, self-reporting of incomes could provide a misleading portrait of the income distribution. To test the accuracy of IRS records, we compare them to independently tabulated state income tax returns between 1919 and 1945 from states with more comprehensive and rigorously enforced tax collection procedures. State income tax records show lower overall levels of income inequality than IRS records. However, we still find that top income concentrations declined across the period between 1929 and World War II. These findings attest to the sensitivity of distributional estimation to the reporting selectivity and economic quality of underlying tax data, suggesting that the existing IRS-derived series systematically overstates top-income concentration in the interwar period. (JEL H2, N32, D31, E01)     

INEQUALITY AND TRUST: NEW EVIDENCE FROM PANEL DATA

We estimate the causal link from income inequality to generalized trust by reconsidering the country‐level evidence on this issue. First, we exploit the panel dimension of the data, thus controlling for any country unobservable time‐invariant variables, and find a negative relationship between the two variables that holds only for developed countries. Second, we focus on these advanced economies and provide instrumental variable estimates using the predicted exposure to technological change as an exogenous driver of inequality. According to our findings, the negative causal effect of inequality on trust is even larger than that coming from ordinary least squares estimation. We also provide new insights on the effects of different dimensions of inequality, exploiting measures of both static inequality—such as the Gini index and top income shares—and dynamic inequality—proxied by intergenerational income mobility. (JEL D31, O15, Z13)     

Uneven Development and Local Inequality in the U.S. South: The Role of Outside Investment,Landed Elites,and Racial Dynamics

This paper develops a historically contingent understanding of patterns of uneven economic development in the U.S. South. We conceptualize spatial variation in economic development and its consequences for inequality to be embedded in both local and international dynamics. The character of local economic development, it is argued, reflects the organizational base and heterogeneity of local elites, the divisions and relative power of nonelites, and the embeddedness of the local political economy in national and world systems of politics and production. These ideas are developed and made historically and spatially specific through an analysis of uneven development in one Southern state, North Carolina. Our findings suggest that contemporary patterns of uneven development and the resulting income deprivations and inequality reflect conditional interactions between elite economic projects and racial divisions within the working class. We find that outside investment seems to reproduce rather than disrupt local patterns of inequality and poverty.     

FDI AND INCOME INEQUALITY: EVIDENCE FROM A PANEL OF U.S. STATES

This study employs state‐level panel data to explore the relationship between inward foreign direct investment (FDI) and income inequality in the United States. Using panel cointegration techniques that allow for cross‐sectional heterogeneity and cross‐sectional dependence, we find that, in the long run, FDI exerts a significant and robust negative effect on income inequality in the United States. This result for the United States as a whole does not imply that FDI narrows income gaps in each individual state. There is considerable heterogeneity in the long‐run effects of FDI on income inequality across states, with some states (21 out of 48 cases) exhibiting a positive relationship between FDI in income inequality.(JEL F21, D31, C23)     

NUMERACY AND ON-THE-JOB PERFORMANCE: EVIDENCE FROM LOAN OFFICERS

We examine how the numeracy level of employees influences their on-the-job performance. Based on an administrative dataset of a retail bank we relate the performance of loan officers in a standardized math test to the accuracy of their credit assessments of small business borrowers. We find that loan officers with a high level of numeracy are more accurate in assessing the credit risk of borrowers. The effect is most pronounced during the precrisis credit boom period when it is arguably more difficult to pick out risky borrowers. (JEL G21, J24)     

Does income inequality contribute to credit cycles?

Recent literature presented arguments linking income inequality to the financial crash of 2007–2008. One proposed channel is expected to work through bank credit. I analyze the relationship between income inequality and bank credit in a panel cointegration framework and find that they have a long-run dependency relationship. Results show that income inequality contributed to the increase of bank credit in developed economies after the Second World War.     

FINANCIAL DEVELOPMENT AND WAGE INEQUALITY: THEORY AND EVIDENCE

We argue that financial market development contributed to the rise in the skill premium and residual wage inequality in the United States since the 1980s. We present an endogenous growth model with imperfect credit markets and establish how improving the efficiency of these markets affects modes of production, innovation, and wage dispersion between skilled and unskilled workers. The experience of U.S. states following banking deregulation provides empirical support for our hypothesis. We find that wages of skilled workers increased by between 0.5% and 6.3% following deregulation while those of unskilled workers fell by between 3.5% and 8.7%. Similarly, residual (or within‐group) inequality increased; the 90–50 percentile ratio of residuals from a Mincerian wage regression and their standard deviation increased by 4.2% and 1.7%, respectively. (JEL E25, J31, G24)     

WHAT MOTIVATES POLITICAL PREFERENCES? SELF‐INTEREST,IDEOLOGY, AND FAIRNESS IN A LABORATORY DEMOCRACY

Substantial prior literature has established that subjects in laboratory experiments are typically willing to sacrifice their own well being to make financial allocations more equal among participants. We test the applicability of this result in an environment that contains some of the key contextual issues that are usually excluded from more abstract games, but which might be important in situations involving income redistribution. Our general finding is that votes for a redistributive tax are almost entirely in accordance with self‐interest: above‐average earners vote for low tax rates and below‐average earners vote for high tax rates. A measure of subjects' preferences for fairness or equality, their self‐reported economic ideology, is not directly related to their voting behavior in this experiment. Because the ideology measure should be correlated with any intrinsic preferences regarding inequality aversion, we conclude that any preferences for fairness or inequality that our subjects possess are not strong enough to overcome self‐interest in this context. We do, however, find evidence for a possible indirect effect of ideology on choice behavior in that more conservative subjects tend to be more responsive to their self‐interest than the more liberal subjects. (JEL C90, D63)     

Earnings and Expenditures on Household Services in Married and Cohabiting Unions

Despite the rise in women’s paid employment, little is known about how women and their partners allocate money to outsource domestic tasks, especially in unmarried unions. Tobit analyses of 6,170 married and cohabiting couples in the 1998 Consumer Expenditure Survey test hypotheses that recognize gender inequality between partners, gender typing of household tasks, and differences between cohabitation and marriage. Women’s earned income is more important than men’s for spending on female tasks. Men’s earnings are not more important for male tasks, but the earnings of married men are more strongly linked to expenditures on female tasks than are the earnings of cohabiting men. The research indicates that working women leverage their earnings to reduce their domestic burden through outsourcing.     

Changing Income Inequality in Nonmetropolitan Counties, 1980 to 1990*

Abstract Income inequality has been increasing across the United States, but little is known about changing income inequality in nonmetropolitan counties. Data from the 1980 and 1990 Summary Tape Files of the U.S. Census of Population and Housing are used to estimate ordinary least squares models of change in income inequality. Household income inequality increased in a smaller share of nonmetro than metro counties from 1980 to 1990, and increases in income inequality were influenced more strongly by economic restructuring in nonmetro than in metro counties. Other factors, such as change in household structure, demographic composition, and labor supply and job quality, were generally similar in affecting income inequality in nonmetro and metro counties. The greater importance of economic restructuring in nonmetro counties indicates the lesser diversity and smaller size of local economies, and their greater vulnerability to forces of economic restructuring.     

INSTITUTIONS,HOUSEHOLD CREDIT COMPOSITION,AND THE BUSINESS CYCLE

We show that the negative effect of household credit growth on subsequent economic growth documented in the recent literature is not the same across countries. The effect is stronger in countries with weak institutions where the fraction of consumer credit in total household credit is greater. That is an important nuance as consumer credit is a sizable part of household credit in many emerging markets and its rapid buildup should be observed with the same caution as a rapid buildup in housing credit. (JEL G21, E32, E44)