| This dissertation provides empirical evidence on the effect of market changes on consumer and firm behavior. Mortgage markets have experienced phenomenal change over the past few decades, from both deregulation and financial innovation. The first two chapters of this dissertation examine the impact of these changes on borrowers. The first chapter develops a technique for assessing the impact of changes in the mortgage market on household behavior that is based on an implication of the permanent income hypothesis. The technique is implemented using household-level panel data, and the results show that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects.The second chapter provides a rigorous assessment of the homeownership experiences of subprime borrowers. The subprime mortgage market, characterized by risk-based pricing, emerged in the early 1990s, and contributed to the increased homeownership rate experienced in the U.S. since that period. However, its emergence also significantly contributed to the recent national foreclosure boom. This chapter considers homeowners who used subprime mortgages to buy their homes in Massachusetts over the 1989--2007 period, and estimates how often these borrowers end up in foreclosure using a duration model of homeownership termination. Two main findings are presented. First, homeownerships that begin with a subprime purchase mortgage end up in foreclosure almost 20 percent of the time, more than 6 times as often as experiences that begin with prime purchase mortgages.Second, house price appreciation plays a significant role in generating foreclosures. The third chapter uses panel data to analyze the effect of market structure on price dispersion in the airline industry. Competition is found to have a negative effect on price dispersion, in contrast to previous studies. The effects of competition on price dispersion are significant on routes that are characterized by consumers with relatively heterogeneous elasticities of demand, while the effects are insignificant on routes with a more homogeneous customer base. This implies that increased competition erodes the ability carriers to price discriminate, resulting in reduced price dispersion. |
