SAFE working paper
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364
With open banking, consumers take greater control over their own financial data and share it at their discretion. Using a rich set of loan application data from the largest German FinTech lender in consumer credit, this paper studies what characterizes borrowers who share data and assesses its impact on loan application outcomes. I show that riskier borrowers share data more readily, which subsequently leads to an increase in the probability of loan approval and a reduction in interest rates. The effects hold across all credit risk profiles but are the most pronounced for borrowers with lower credit scores (a higher increase in loan approval rate) and higher credit scores (a larger reduction in interest rate). I also find that standard variables used in credit scoring explain substantially less variation in loan application outcomes when customers share data. Overall, these findings suggest that open banking improves financial inclusion, and also provide policy implications for regulators engaged in the adoption or extension of open banking policies.
374
When the COVID-19 crisis struck, banks using internal-rating based (IRB) models quickly recognized the increase in risk and reduced lending more than banks using a standardized approach. This effect is not driven by borrowers’ quality or by banks in countries with credit booms before the pandemic. The higher risk sensitivity of IRB models does not always result in lower credit provision when risk intensifies. Certain features of the IRB models – the use of a downturn Loss Given Default parameter – can increase banks’ resilience and preserve their intermediation capacity also during downturns. Affected borrowers were not able to fully insulate and decreased corporate investments.
348
We investigate the link between Big Five personality traits and the marginal propensity to consume (MPC) for users of a German financial account aggregator app. We use 1,700 survey responses and transaction data of 56,000 app users to assess whether Big Five personality traits help explain MPC heterogeneity. We find that extraversion corresponds to an increase in consumption whereas agreeableness and neuroticism correspond to a decrease in consumption. We test this with trust and risk preferences and find that risk indicates more explanatory power in consumption response than the Big Five. Our findings help policy makers target individuals more efficiently.
339
There have been numerous attempts to reform the Economic and Monetary Union (EMU) after the Great Recession, however the reform success varies greatly among sub-fields. Additionally, the political science research community has engaged a diverse set of theory- driven explanations, causal mechanisms, and variables to explain respective reform success. This article takes stock of reform policies in the EMU from two angles. First, it outlines distinct theoretical approaches that seek to explain success and failure of reform proposals and second, it surveys how they explain policy output and policy outcome in four policy subfields: financial stabilization, economic governance, financial solidarity, and cooperative dissolution. Finally, the article develops a set of explanatory factors from the existing literature that will be used for a Qualitative Comparative Analysis (QCA).
350
This work uses financial markets connected by arbitrage relations to investigate the dynamics of price and liquidity discovery, which refer to the cross-instrument forecasting power for prices and liquidity, respectively. Specifically, we seek to understand the linkage between the cheapest to deliver bond and closest futures pairs by using high-frequency data on European governments obligations and derivatives. We split the 2019-2021 sample into three subperiods to appreciate changes in the liquidity discovery induced by the COVID-19 pandemic. Within a cointegration model, we find that price discovery occurs on the futures market, and document strong empirical support for liquidity spillovers both from the futures to the cash market as well as from the cash to the futures market.
342
Global consensus is growing on the contribution that corporations and finance must make towards the net-zero transition in line with the Paris Agreement goals. However, most efforts in legislative instruments as well as shareholder or stakeholder initiatives have ultimately focused on public companies: for example, most disclosure obligations result from the given company’s status of being listed on a stock exchange.
This article argues that such a focus falls short of providing a comprehensive approach to the problem of climate change. In doing so, it examines the contribution of private companies to climate change, the relevance of climate risks for them, as well as the phenomenon of brown-spinning. We show that one cannot afford to ignore private companies in the net-zero transition and climate change adaptation. Yet, private companies lack several disciplining mechanisms available to public companies such as institutional investor engagement, certain corporate governance arrangements, and transparency through regular disclosure obligations. At this stage, only some generic regulatory instruments such as carbon pricing and environmental regulation apply to them. The article closes with a discussion of the main policy implications. Primarily, we propose extending sustainability disclosure requirements to private companies.
Sustainability disclosures aim at promoting a transition to a greener economy, rather than (only) protecting investors by addressing information asymmetry. Therefore, these disclosures should encompass private companies that are of relevance for the net-zero transition. Such disclosures can be a powerful tool in shedding light on the polluting private companies that have so far been in the dark as well as serving as a disciplining mechanism.
343
While the COVID-19 pandemic had a large and asymmetric impact on firms, many countries quickly enacted massive business rescue programs which are specifically targeted to smaller firms. Little is known about the effects of such policies on business entry and exit, factor reallocation, and macroeconomic outcomes. This paper builds a general equilibrium model with heterogeneous and financially constrained firms in order to evaluate the short- and long-term consequences of small firm rescue programs in a pandemic recession. We calibrate the stationary equilibrium and the pandemic shock to the U.S. economy, taking into account the factual Paycheck Protection Program (PPP) as a specific grant policy. We find that the policy has only a small impact on aggregate employment because (i) jobs are saved predominately in less productive firms that account for a small share of employment and (ii) the grant induces a reallocation of resources away from larger and less impacted firms. Much of this reallocation happens in the aftermath of the pandemic episode. While a universal grant reduces the firm exit rate substantially, a targeted policy is not only more cost-effective, it also largely prevents the creation of “zombie firms" whose survival is socially inefficient.
355
The reuse of collateral can support the efficient allocation of safe assets in the financial system. Exploiting a novel dataset, we show that banks substantially increase their reuse of sovereign bonds in response to scarcity induced by Eurosystem asset purchases. While repo rates react little to purchase-induced scarcity when reuse is low, they become increasingly sensitive at high levels of reuse. An elevated reuse rate is also associated with more failures to deliver and a higher volatility of repo rates in the cross-section of bonds. Our results highlight the trade-off between shock absorption and shock amplification effects of collateral reuse.
365
Short sale bans may improve market quality during crises: new evidence from the 2020 Covid crash
(2022)
In theory, banning short selling stabilizes stock prices but undermines pricing efficiency and has ambiguous impacts on market liquidity. Empirical studies find mixed and conflicting results. This paper leverages cross-country policy variation during the 2020 Covid crisis to assess differential impacts of bans on stock liquidity, prices, and volatility. Results suggest that bans improved liquidity and stabilized prices for illiquid stocks but temporarily diminished liquidity for highly liquid stocks.The findings support theories in which short sale bans may improve liquidity by selectively filtering out informed— potentially predatory—traders. Thus, policies that target the most illiquid stocks may deliver better overall market quality than uniform short sale bans imposed on all stocks.
351
We investigate what statistical properties drive risk-taking in a large set of observational panel data on online poker games (n=4,450,585). Each observation refers to a choice between a safe 'insurance' option and a binary lottery of winning or losing the game. Our setting offers a real-world choice situation with substantial incentives where probability distributions are simple, transparent, and known to the individuals. We find that individuals reveal a strong and robust preference for skewness. The effect of skewness is most pronounced among experienced and losing players but remains highly significant for winning players, in contrast to the variance effect.
337
In times of increased political polarization, the continuing existence of a deliberative arena where people with antagonistic views may engage with each other in non-violent ways is critical for democracy to live on. Social media are usually not conceived as such arenas. On the contrary, there has been widespread worry about their role in increasing polarization and political violence. This paper suggests a more positive impact of social media on democracy. Our analysis focuses on the subreddit “r/WallStreetBets” (r/WSB) - a finance-related forum that came under the spotlight when its users coordinated a financial attack on hedge funds during the Gamestop saga in early 2021. Based on an original method attributing partisanship scores to users, we present a network analysis of interactions between users at the opposite sides of the political spectrum on r/WSB. We then develop a content analysis of politically relevant threads in which polarized users participate. Our analyses show that r/WSB provides a rare space where users with antagonistic political leanings engage with each other, debate, and even cooperate.
346
Agencies around the world are in the process of developing taxonomies and standards for sustainable (or ESG) investment products. A key assumption in our model is that of non-consequentialist private investors (households) who derive a "warm glow" decisional utility when purchasing an investment product that is labelled as sustainable. We ask when such labelling is socially beneficial even when the socialplanner can impose a minimum standard on investment and production. In a model of financial constraints (Holmström and Tirole 1997), which we close to include consumer surplus, we also determine the optimal labelling threshold and show how its stringency is affected by determinants such as the prevalence of warm-glow investor preferences, the presence of social network effects, or the relevance of financial constraints at the industry level.
333
This article compares the three initial safety nets spanned by the European Union in response to the Covid-19 crisis: SURE, the Pandemic Crisis Support, and the European Guarantee Fund. It compares their design regarding scope, generosity, target groups, implementation, the types of solidarity and conditionality, and asks how they reflect on core-periphery relations in the EU. The article finds that the most important factor in all three instruments is risk-sharing between member states, even though SURE and the EGF display elements of fiscal solidarity. Finally, the article shows that Euro crisis countries from the South are the main recipients of financial aid, while Central and East European countries receive significantly less assistance and core countries in the North and West have no need for them.
357
Spillovers of PE investments
(2022)
In this paper, we investigate a primary potential impact of leveraged buyout (LBOs) transactions: the effects of LBOs on the peers of the LBO target in the same industry. Using a data sample based on US LBO transactions between 1985 and 2016, we investigate the impact of the peer firms in the aftermath of the transaction, relative to non-peer firms. To account for potential endogeneity concerns, we employ a network-based instrumental variable approach. Based on this analysis, we find support for the proposition that LBOs do indeed matter for peer firms’ performance and corporate strategy relative to non-peer firms. Our study supports a learning factor hypothesis: peers gain by learning from the LBO target to improve their operational performance. Conversely, we find no evidence to support the conjecture that peers lose due to the increased competitiveness of the LBO target firm.
349
The present paper proposes an overview of the existing literature covering several aspects related to environmental, social, and governance (ESG) factors. Specifically, we consider studies describing and evaluating ESG methodologies and those studying the impact of ESG on credit risk, debt and equity costs, or sovereign bonds. We further expand the topic of ESG research by including the strand of the literature focusing on the impact of climate change on financial stability, thus allowing us to also consider the most recent research on the impact of climate change on portfolio management.
361
This paper utilizes a comprehensive worker-firm panel for the Netherlands to quantifythe impact of ICT capital-skill complementarity on the finance wage premium after the Global Financial Crisis. We apply additive worker and firm fixed-effect models to account for unobserved worker- and firm-heterogeneity and show that firm fixed-effects correct for a downward bias in the estimated finance wage premium. Our results indicate a sizable finance wage premium for both fixed- and full-hourly wages. The complementarity between ICT capital spending and the share of high skill workers at the firm-level reduces the full-wage premium considerably and the fixed-wage premium almost entirely.
375
Many people do not understand the concepts of life expectancy and longevity risk, potentially leading them to under-save for retirement or to not purchase longevity insurance, which in turn could reduce wellbeing at older ages. We investigate alternative ways to increase the salience of both concepts, allowing us to assess whether these change peoples’ perceptions and financial decision making. Using randomly-assigned vignettes providing subjects with information about either life expectancy or longevity, we show that merely prompting people to think about financial decisions changes their perceptions regarding subjective survival probabilities. Moreover, this information also boosts respondents’ interest in saving and demand for longevity insurance. In particular, longevity information influences both subjective survival probabilities and financial decisions, while life expectancy information influences only annuity choices. We provide some evidence that many people are simply unaware of longevity risk.
370
Advances in Machine Learning (ML) led organizations to increasingly implement predictive decision aids intended to improve employees’ decision-making performance. While such systems improve organizational efficiency in many contexts, they might be a double-edged sword when there is the danger of a system discontinuance. Following cognitive theories, the provision of ML-based predictions can adversely affect the development of decision-making skills that come to light when people lose access to the system. The purpose of this study is to put this assertion to the test. Using a novel experiment specifically tailored to deal with organizational obstacles and endogeneity concerns, we show that the initial provision of ML decision aids can latently prevent the development of decision-making skills which later becomes apparent when the system gets discontinued. We also find that the degree to which individuals 'blindly' trust observed predictions determines the ultimate performance drop in the post-discontinuance phase. Our results suggest that making it clear to people that ML decision aids are imperfect can have its benefits especially if there is a reasonable danger of (temporary) system discontinuances.
371
The leading premium
(2022)
In this paper, we consider conditional measures of lead-lag relationships between aggregate growth and industry-level cash-flow growth in the US. Our results show that firms in leading industries pay an average annualized return 3.6\% higher than that of firms in lagging industries. Using both time series and cross sectional tests, we estimate an annual pure timing premium ranging from 1.2% to 1.7%. This finding can be rationalized in a model in which (a) agents price growth news shocks, and (b) leading industries provide valuable resolution of uncertainty about the growth prospects of lagging industries.
341
Joint Institutional Frameworks in bilateral relations are circumscribed in policy scope, can lack adequate instruments for dynamic adaptation and provide limited access to decision-making processes internal to the contracting parties. Informal governance, the involvement of private actors as well as rules such as equivalence provide avenues to remedy these limits in bilateral relations in sectoral governance. Through bilateral agreements, the scope of territorially bound political authority is expanded. The formalised and institutionalised frameworks and bodies established are, however, frequently accompanied by mechanisms of informal cooperation and special rules either to cover policy fields where no contractual relation exists, to provide for flexible solutions where needed, or to involve both public and private actors that otherwise do not have access to formal decision-making bodies. This SAFE working paper conceptualises formal and informal modes of cooperation and varying actor constellations. It discusses their relevance for the case of bilateral relations between the European Union (EU) and Switzerland in sectoral governance. More specifically, it draws lessons from EU-Swiss sectoral governance of financial and electricity markets for the future relations of the EU with the United Kingdom (UK). The findings suggest that there are distinct governance arrangements across sectors, while the patterns of sectoral governance are expected to look very much alike in the United Kingdom and Switzerland in the years to come. The general takeaway is that Brexit will have repercussions for the EU’s external relations with other third countries, putting ever more emphasis on formal and rule-based approaches, while leaving a need for sector-specific cross border co-operation.
363
With free delivery of products virtually being a standard in E-commerce, product returns pose a major challenge for online retailers and society. For retailers, product returns involve significant transportation, labor, disposal, and administrative costs. From a societal perspective, product returns contribute to greenhouse gas emissions and packaging disposal and are often a waste of natural resources. Therefore, reducing product returns has become a key challenge. This paper develops and validates a novel smart green nudging approach to tackle the problem of product returns during customers’ online shopping processes. We combine a green nudge with a novel data enrichment strategy and a modern causal machine learning method. We first run a large-scale randomized field experiment in the online shop of a German fashion retailer to test the efficacy of a novel green nudge. Subsequently, we fuse the data from about 50,000 customers with publicly-available aggregate data to create what we call enriched digital footprints and train a causal machine learning system capable of optimizing the administration of the green nudge. We report two main findings: First, our field study shows that the large-scale deployment of a simple, low-cost green nudge can significantly reduce product returns while increasing retailer profits. Second, we show how a causal machine learning system trained on the enriched digital footprint can amplify the effectiveness of the green nudge by “smartly” administering it only to certain types of customers. Overall, this paper demonstrates how combining a low-cost marketing instrument, a privacy-preserving data enrichment strategy, and a causal machine learning method can create a win-win situation from both an environmental and economic perspective by simultaneously reducing product returns and increasing retailers’ profits.
347
Households regularly fail to make optimal financial decisions. But what are the underlying reasons for this? Using two conceptually distinct measures of time inconsistency based on bank account transaction data and behavioral measurement experiments, we show that the excessive use of bank account overdrafts is linked to time inconsistency. By contrast, there is no correlation between a survey-based measure of financial literacy and overdraft usage. Our results indicate that consumer education and information may not suffice to overcome mistakes in households’ financial decision-making. Rather, behaviorally motivated interventions targeting specific biases in decision-making should also be considered as effective policy tools.
356
Identifying the cause of discrimination is crucial to design effective policies and to understand discrimination dynamics. Building on traditional models, this paper introduces a new explanation for discrimination: discrimination based on motivated reasoning. By systematically acquiring and processing information, individuals form motivated beliefs and consequentially discriminate based on these beliefs. Through a series of experiments, I show the existence of discrimination based on motivated reasoning and demonstrate important differences to statistical discrimination and taste-based discrimination. Finally, I demonstrate how this form of discrimination can be alleviated by limiting individuals’ scope to interpret information.