Three essays in household finance

Abstract

This thesis contains three chapters relating to the field of household finance. In the first chapter household life cycle investment behaviour is investigated using a panel of Norwegian administrative data and tax records. Dealing with selection and identification issues, the data suggests a double adjustment as people age: a rebalancing of the portfolio away from stocks as households approach retirement, and a peak in stock market participation around the time when they reach retirement. A theoretical model predicting these life cycle patterns of investment behavior is then provided. This is achieved by extending existing models with a per period participation cost in risky asset markets and a small perceived probability of being cheated. In the second chapter the relation between household financial asset holdings and unemployment is investigated. Consistent with a simple theoretical model, the data shows increased savings and a shift towards safer assets in the years leading up to unemployment, and depletion of savings during unemployment. This suggests that at least some households can foresee and prepare for upcoming unemployment, which indicates that private savings can complement publicly provided unemployment insurance. The final chapter identifies the causal effect of lump-sum severance payments on non-employment duration in Norway by exploiting a discontinuity in eligibility at age 50. A severance payment worth 1.2 months' earnings lowers the fraction re-employed after one year by six percentage points. This effect is decreasing in wealth, which supports the view that the effect of severance pay should be interpreted as evidence of liquidity constraints. Finding liquidity constraints in Norway, despite its equitable wealth distribution and generous welfare state, suggests they are likely to exist also in other countries.