When Fair Isn’t Fair:
Understanding Choice Reversals Involving Social Preferences
with J. Andreoni, B. Barton, D. Bernheim and J. Naecker
Journal of Political Economy, 2020, 128 (5)
In settings with uncertainty, tension exists between ex ante and ex post notions of fairness. Subjects in an experiment most commonly select the ex ante fair alternative ex ante and switch to the ex post fair alternative ex post. One potential explanation embraces consequentialism and construes reversals as time inconsistent. Another abandons consequentialism in favor of deontological (rule-based) ethics and thereby avoids the implication that revisions imply inconsistency. We test these explanations by examining contingent planning and the demand for commitment. Our findings suggest that the most common attitude toward fairness involves a time-consistent preference for applying a naive deontological heuristic.
Consumption Response to Credit Expansions:
Evidence from Experimental Assignment of 45,307 Credit Lines
American Economic Review, 2022, 112 (1), Lead Article
In a field experiment that constructs a randomized credit limit shock, participants borrow to spend 11 cents on the dollar in the first quarter and 28 cents by the third year. Effects extend to those far from the limit, those who had the new limits as available credit, and those with a liquid asset buffer. In the short-run, flexible and installment contracts are used in tandem, with unconstrained using installments more. Long-run borrowing is predominantly using installments. Near limits, participants borrow when credit expands but save out of constraints when limits are tight. Findings support a buffer-stock interpretation emphasizing precautionary saving.
Forbearance vs. Interest Rates:
Experimental Tests of Liquidity and Strategic Default Triggers
I use the random assignment of debt relief policies in a large-scale field experiment to test default models emphasizing liquidity and strategic behavior. In contrast to liquidity being the sole trigger, borrowers respond differently to a dollar reduction in current payments when delivered through forbearance or interest rate reduction: forbearance reduces payments twice as much, whereas delinquencies are more responsive to a rate reduction. Compatible with strategic behavior, borrowers default in response to changes in future payments orthogonal to solvency and liquidity. Compatible with the endogeneity of triggers, whether forbearance or interest rates are more effective, and defaults are strategic is tightly linked to borrower balance sheets. I characterize a single strategic default trigger whose location is influenced by distress, precaution, and assets. The findings have implications for targeting loan modifications and modeling the pass-through of interest rates.