Essays in Household Finance

In this dissertation I examine the causes of household financial decision making. The first two chapters use administrative data in Sweden to study how wealth effects financial risk taking. In the third chapter I study the interaction between saving and health in the Health and Retirement Study (HRS).

The first two chapters use an administrative data set of Swedish lottery players that were randomly assigned 500M USD to estimate the causal effect of wealth on various measures of financial risk taking. From 1999-2007 the Swedish tax authorities collected detailed records of asset holdings for the entire Swedish population to implement a tax on pre-existing wealth. During this same period, I have gained access to records of over 300K lottery winners that won prizes in three distinct lottery subsamples. By linking these two data sets, I have developed an ideal laboratory to estimate the causal effect of wealth on outcomes.

The first chapter of this dissertation estimates the causal effect of wealth on stock market participation. A $150,000 windfall gain increases stock ownership probability among pre-lottery non-participants by 12 percentage points, while pre-lottery stock holders are unaffected. The effect is immediate, seemingly permanent and heterogeneous in intuitive ways. Standard lifecycle models predict wealth effects far too large to match our causal estimates under common calibrations. Additional analyses suggest a limited role for explanations such as procrastination or real-estate investment. Overall, results suggest that "nonstandard" beliefs or preferences contribute to the nonparticipation of households across many demographic groups.

In the second chapter of this dissertation I estimate the causal effect of wealth on the share of risky assets in a household's financial portfolio. We find that $150,000 causes a 9 percentage point decrease in the average household portfolio's equity share in their financial portfolio. The effect is immediate, not explained by passive investing, and negative in all subsamples considered. A decrease in risk taking could indicate increasing relative risk aversion. However, we show that a dynamic model with realistic income profile can replicate the estimated decrease in portfolio risk, and that caution should be used when inferring risk preference from portfolio shares.

In the third chapter of this dissertation I explore the role of health on retirement savings. Using the HRS, I estimate preferences for wealth when older individuals are in poor health. I find a high marginal value of wealth in the poor health state, and show that it is an important channel that encourages saving late in life.