Essays in public economics

This dissertation, "Essays in Public Economics, " comprises three chapters probing topics related to government involvement in real estate, mortgage, and local economic markets. The first chapter is titled "Mortgage Guaranties, Housing Choice, and Borrower Riskiness: Evidence from the VA Home Loan Program." In this chapter, I explore how a family's home serves as a mediating channel for its economic and social well-being. To do so, I make use of a policy change within the Department of Veterans Affairs Home Loan program ("VA Home Loan program") that altered the total amount of mortgage principal that the United States federal government would insure on loans issued to veterans and servicemembers. Prior to an increase in the guaranty cap offered to mortgage lenders through the VA Home Loan program, I document nearly complete bunching of loan amounts at this cap. When the cap rises, I show that borrowers were more positively selected: they were more likely to repay their loans despite taking out substantially larger loans. Analyzing the economics behind the guaranty cap reveals that these findings are inconsistent with rational expectations of borrowers and profit-maximizing lenders. This suggests that, even though the housing market is highly intermediated by experienced professionals, the market for home loans exhibits behavioral anomalies that may help explain "bubbles" and crashes. An unintended benefit of this bunching behavior is that the increase in the cap induces large, discrete improvements in home and neighborhood quality even though lenders and borrowers have not changed. Leveraging this allows me to evaluate the causal effect of living in a home that is more expensive partly because it is larger and partly because it is associated with a better neighborhood. I find this causal effect is substantial; borrowers' incomes rise by three percent due in part to greater proximity to high-paying jobs. The second chapter, co-authored with Evan Mast of the Upjohn Institute, formerly of the Stanford University Department of Economics, is titled "Which Places Should Place-Based Policy Target? Heterogeneity in Local Amenity Externalities." In this essay, Mast and I utilize new machine learning techniques to answer unsolved questions relating to the efficacy of place-based policies, and the heterogeneity in these effects, on localized amenities. Place-based policies are programs that target geographic areas, rather than individuals, and provide some combination of tax benefits for businesses and improved services for residents. In general, economists argue that since the goal of these programs is typically to help poor households, policymakers would be better served by targeting these households directly instead of tying benefits to a particular place, which can distort firm and household location choices and generate deadweight loss. However, place-based policy could improve efficiency if it targets areas with large amenity or agglomeration externalities. We begin by using a Census-updating instrument to show that increased federal spending in a county, and the associated economic stimulus, have substantial amenity externalities on average. Mast and I then employ two machine learning algorithms, the causal tree and causal forest algorithms, to conduct a data-driven search for heterogeneity in this effect and find that it is meaningfully larger in economically struggling counties. This suggests heterogeneity in amenity externalities works in favor of policies targeting struggling areas and should be considered in evaluations of specific place-based programs. The third chapter is titled "The Mortgage Recording Tax: Incidence and Market Power Implications." In this chapter, I study the policy tool known as the mortgage recording tax, an ad valorem tax on mortgage loan principal. I measure how, and explain the economic mechanisms through which, the mortgage recording tax affects mortgage loan terms and mortgage loan refinance behavior. I highlight how this policy instrument induces changes in the propensity to refinance that can be attributed to behavioral anomalies in which households overestimate how the cost of refinancing a loan changes with the tax rate. When interest rates decline and households seek to refinance mortgages, this tax creates an asymmetry between the borrower's incumbent lender and other prospective lenders. Exploiting variation in the mortgage recording tax rate in New York state over time within a county and between counties at any given time, I estimate that a typical tax increase of 25 basis points leads to the crowding out of approximately one-in-seven mortgage refinances. This is despite it still being economically advantageous for these borrows to refinance. In measuring the economic incidence of this tax, I show that, on average, this same tax change decreases initial mortgage interest rates by 2 basis points and increases loan-to-purchase price ratios by 1.32 percentage points. The mortgage interest rate effect is larger for subprime borrowers; interest rates on loans for these households decrease by an average of 8 basis points. Tax incidence calculations imply that lenders attempt to discount total payments for subprime borrowers who stand to gain the most from a future refinance.

Keywords: Economics.
Advisor: Hoxby Caroline Minter 
Duggan Mark G. (Mark Gregory) 
Persson Petra