| This dissertation consists of three essays in Financial Economics. The first essay concerns low-income Americans' usage of financial services. Approximately 20% of US households earning less than ;I use a unique dataset of low-income participants of financial education workshops, and exploit quasi-random variation in the likelihood of opening a bank account after the workshop to overcome selection bias and estimate causal effects. I find that opening an account reduces delinquency and raises the likelihood of credit score improvement. However, contrary to the benefits often ascribed to becoming banked, I find no effects on saving, self-reported overspending, and several measures of "financial wellbeing" such as finances-related stress. Surprisingly, I find only small aggregate effects of opening an account on actual usage of mainstream credit, as measured by credit card ownership, for example. There is heterogeneity in these effects, however, based on an individual's level of financial literacy. Those who graduated high school and who are presumably more financially literate do in fact increase their usage of mainstream credit when they open an account, but those who did not graduate high school do not. Finally, I find that access to mainstream financial services enhances the effectiveness of financial education: among the workshop participants that I study, opening an account increases self-reported financial literacy.;In the second essay I explore the theoretical effects of one of the most important consequences of entering the mainstream financial system: facing a higher rate of return on saving and a lower cost of borrowing. I develop a simple two period life-cycle model of consumption in which voluntary default is possible and examine the effects of favorable changes in saving and borrowing rates on consumer behavior. The incorporation of default in the model is important for its applicability to the effects of entering the mainstream financial system since those who operate outside the mainstream system tend to be low-income individuals who are more prone to default. It is also novel: the effects of interest rate changes on consumer behavior ("the interest elasticity of consumption") are of great importance in economics and have been researched extensively, but the implications of incorporating default in the basic life-cycle model have never been studied.;I find that when the cost of default is not sufficiently dependent on the amount defaulted upon, the possibility of default weakens the link between first period consumption and second period utility and leads to overconsumption relative to the no-default model. It also results in a counter-intuitive negative marginal propensity to consume out of wealth: those who are wealthier consume less. It follows that the wealth effects of favorable interest rate changes imply less rather than more consumption and that such rate changes are more likely to encourage saving and to discourage borrowing than in the no-default model. Favorable rate changes decrease the probability of default and the expected defaulted-upon amount for all savers, who may default on a pre-existing obligation in the model, as well as for borrowers who initially borrow more than some threshold. I extend the model to allow for partial repayment of debt in both periods. I show that decreasing the borrowing rate lowers delinquency by affecting the tradeoff between delinquency and borrowing as means to finance first period consumption.;The third essay, co-authored with Andrew Ang and Paul Tetlock, examines asset pricing patterns in over-the-counter (OTC) stocks, which are stocks that trade on either the OTC Bulletin Board (OTCBB) or OTC Link (formerly Pink Sheets, or PS) interdealer quotation system. Compared to stocks that trade on the NYSE, Amex, and NASDAQ ("listed stocks"), OTC stocks are far less liquid, disclose less information, and exhibit lower institutional holdings. We exploit these different market conditions to test theories of cross-sectional return premiums. Compared to return premiums in listed markets, the OTC premium for illiquid stocks is several times higher, the OTC premiums for size, value, and volatility are similar, and the OTC premium for momentum is three times lower. The OTC premiums for illiquidity, size, value, and volatility are largest among stocks that are held almost exclusively by retail investors and those that do not disclose financial information. (Abstract shortened by UMI.). |
