Lorenz Kueng

ABSTRACT: Households tend to hold substantial amounts of non-financial assets in the form of consumer goods inventories that are unobserved by traditional measures of wealth, about $725 on average for products covered by our sample. Such holdings can eclipse total financial assets among households in the lowest income quintile. Households can obtain significant financial returns from strategically shopping and managing these inventories. In addition, they choose to maintain liquid savings---household working capital---not just for precautionary motives but also to support this inventory management. We demonstrate that households with low levels of inventory earn high marginal returns from investing in household working capital, well above 20%, though these marginal returns decline rapidly as inventory increases. Nevertheless, average returns from inventory management are high---about 50% for the typical household---and affect household portfolio returns substantially for all but the top income and asset quintiles. We provide evidence from scanner and survey data that supports this conclusion. For many households, working capital is therefore an important asset class that has been largely ignored by the household finance literature, and inventory management provides them with an alternative to investing in risky financial markets at low levels of liquid wealth.

ABSTRACT: The growth of the availability and use of detailed financial transaction microdata has dramatically expanded the ability of researchers to understand both household decision-making as well as aggregate fluctuations across a wide range of fields. This class of transaction data is derived from a myriad of sources including financial institutions, FinTech apps, and payment intermediaries. We review how these detailed data have been utilized in finance and economics research and the benefits they enable beyond more traditional measures of income, spending, and wealth. We discuss the future potential for this flexible class of data in firm-focused research, real-time policy analysis, and macro statistics.

ABSTRACT: Many research papers in household finance utilize annual snapshots of household wealth from administrative data, such as tax registries, to calculate "imputed consumption." However, trading costs, unobserved intra-year trades, or unobserved security characteristics may cause measurement error. We document how such errors vary across groups of individuals by income, portfolio characteristics, and wealth and how they are correlated with individual income and balance sheets, asset prices, and the business cycle using transaction-level retail brokerage account data. We find that the economic significance of imputation error is small in many research settings and we discuss robustness checks and econometric specifications to minimize the impact of imputation error in future research.

9. Income Fluctuations and Firm Choice (with Scott Baker and Brian Baugh), Journal of Financial and Quantitative Analysis, Vol. 56, no. 6 (September 2021): 2208-2236. First version, entitled The Elasticity of Household Retailer Choice: July 2015. [Abstract], [Slides], [Public Version].

ABSTRACT: How households shift spending across firms in response to income fluctuations is an important source of risk to individual firms. Using transaction-level data, we study how households interact with the universe of retailers following changes in income. We find that increases in income, both within and across households, result in substitution towards retailers that are higher quality, smaller, more profitable, have higher labor intensity, have higher R&D intensity, and have higher betas. Since these shifts do not average out across retailers, retailer choice has important implications for key financial and macroeconomic outcomes such as profitability and labor demand.

ABSTRACT: Using comprehensive high-frequency state and local sales tax data, we show that shopping behavior responds strongly to changes in sales tax rates. Even though sales taxes are not observed in posted prices and have a wide range of rates and exemptions, consumers adjust in many dimensions. They stock up on storable goods before taxes rise and increase online and cross-border shopping in both the short and long run. The difference between short- and long-run spending responses has important implications for the efficacy of using sales taxes for counter-cyclical policy and for the design of an optimal tax framework. Interestingly, households adjust spending similarly for both taxable and tax-exempt goods. We embed an inventory problem into a continuous-time consumption-savings model and demonstrate that this behavior is optimal in the presence of shopping trip fixed costs. The model successfully matches estimated short-run and long-run tax elasticities. We provide additional evidence in favor of this new shopping-complementarity mechanism.

ABSTRACT: We study the long-run effects of Russia's anti-alcohol campaign, which dramatically altered the relative supply of hard and light alcohol in the late 1980s. We find that this policy shifted young men's long-run preferences from hard to light alcohol decades later and we estimate the age at which consumers form their tastes. We show that the large beer market expansion in the late 1990s had similar effects on young consumers' tastes, while older consumers' tastes remained largely unchanged. We then link these long-run changes in alcohol consumption patterns to changes in male mortality. The shift from hard to light alcohol reduced incidences of binge drinking substantially, leading to fewer alcohol-related deaths. We conclude that the resulting large cohort differences in current alcohol consumption shares explain a significant part of the recent decrease in male mortality. Simulations suggest that mortality will continue to decrease by another 23% over the next twenty years due to persistent changes in consumer tastes. Program impact evaluations that focus only on contemporaneous effects can therefore severely underestimate the total effect of such public policies that change preferences for goods.

ABSTRACT: How do firms in high-income countries adjust to emerging market competition? We estimate how a representative panel of Canadian firms adjusts innovation activities, business strategies, and exit in response to large increases in Chinese imports between 1999 and 2005. On average, process innovation declines more strongly than product innovation. In addition, initially more differentiated firms that survive the increase in competition have better performance ex-post, but are ex-ante more likely to exit. Differentiation therefore does not ensure insulation against competitive shocks but instead increases risk.

ABSTRACT: Complementarity between performance pay and other organizational design elements has been argued to be one potential explanation for stark differences in the observed productivity gains from performance pay adoption. Using detailed data on internal organization for a nationally representative sample of firms, we empirically test for the existence of complementarity between performance pay incentives and decentralization of decision-making authority for tasks. To address endogeneity concerns, we exploit regional variation in income tax progressivity as an instrument for the adoption of performance pay. We find systematic evidence of complementarity between performance pay and decentralization of decision-making from principals to employees. However, adopting performance pay also leads to centralization of decision-making authority from non-managerial to managerial employees. The findings suggest that performance pay adoption leads to a concentration of decision-making control at the managerial employee level, as opposed to a general movement towards more decentralization throughout the organization.

ABSTRACT: When the zero lower bound on nominal interest rate binds, monetary policy may lack traditional tools to stimulate aggregate demand. We investigate whether "unconventional" fiscal policy, in the form of pre-announced consumption tax changes, has the potential to meaningfully shift durables purchases intertemporally and how it is affected by consumer credit. In particular, we test whether car sales react in anticipation of future sales tax changes, leveraging 57 pre-announced changes in state sales tax rates from 1999-2017. We find evidence for substantial tax elasticities, with car sales rising by over 8% in the month before a 1% increase in the sales tax rate. Responses are heterogeneous across households and sensitive to supply of credit. Consumers with high credit risk scores are most able to pull purchases forward. At the same time, other effects such as customer composition and attention lead to an even larger tax elasticity during recessions, despite these credit frictions. We discuss policy implications and the likely magnitudes of tax changes necessary for any substantive long-term responses.

ABSTRACT: Using new transaction data, I find considerable deviations from consumption smoothing in response to large, regular, predetermined, and salient payments from the Alaska Permanent Fund. On average, the marginal propensity to consume (MPC) is 25% for nondurables and services within one quarter of the payments. The MPC is heterogeneous, monotonically increasing with income, and the average is largely driven by high-income households with substantial amounts of liquid assets, who have MPCs above 50%. The account-level data and the properties of the payments rule out most previous explanations of excess sensitivity, including buffer stock models and rational inattention. How big are these "mistakes"? Using a sufficient statistics approach, I show that the welfare loss from excess sensitivity depends on the MPC and the relative payment size as a fraction of income. Since the lump-sum payments do not depend on income, the two statistics are negatively correlated such that the welfare losses are similar across households and small (less than 0.1% of wealth), despite the large MPCs.

ABSTRACT: This paper revisits the important contribution of Hsieh (2003) to the analysis of the intertemporal allocation of household consumption. Using total expenditures to normalize income from the Alaska Permanent Fund Dividend instead of family income and an extended sample of the Consumer Expenditure Survey (CE), I show that log household spending on nondurables is excessively sensitive to the arrival of this predetermined cash flow, with a statistically significant elasticity between 11% and 16%. The previously estimated non-response can largely be attributed to attenuation bias introduced by substantial measurement error in self-reported before-tax family income, in particular over-reporting of very small values.

ABSTRACT: Even with well-developed capital markets, there is no private market mechanism for trading between current and future generations. This generates a potential role for public old-age pension systems to spread economic and demographic shocks among different generations. This paper evaluates how different systems smooth and propagate shocks to productivity, fertility, mortality and migration in a realistic OLG model. We use reductions in the variance of wealth equivalents to measure performance, starting with the existing U.S. system as a unifying framework, in which we vary how much taxes and benefits adjust, and which we then compare to the existing German and Swedish systems. We find that system design and shock type are key factors. The German system and the benefit-adjustment-only U.S. system best smooth productivity shocks, which are by far the most important shocks. Overall, the German system performs best, while the Swedish system, which includes a buffer stock to relax annual budget constraints, performs rather poorly. Focusing on the U.S. system, reliance solely on tax adjustment fares best for mortality and migration shocks, while equal reliance on tax and benefit adjustments is best for fertility shocks.

ABSTRACT: We study the effects of monetary policy shocks on - and their historical contribution to - consumption and income inequality in the United States since 1980 as measured by the Consumer Expenditure Survey. Contractionary monetary policy systematically increases inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary policy shocks account for a non-trivial component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document some of the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.

ABSTRACT: We develop a comprehensive dataset of state and local taxes from 2000--2015 that includes personal income taxes, property taxes, corporate income taxes, sales taxes, estate taxes and excise taxes. We illustrate how state and local taxes have changed over time, over business cycles, and to what extent different taxes co-move within a state or county. We document large differences in the mix of taxes across states and local jurisdictions and note that these differences have become more pronounced over time. Political ideology has strong predictive power over changes in tax rates, and these effects vary substantially across tax types. Moreover, we find that taxes of different types tend to co-move within a jurisdiction, highlighting the importance for researchers to take into account the entirety of the tax system, rather than just a single tax type, when examining responses to tax changes.

ABSTRACT: How predictable are personal income tax rates in the U.S., and does household spending respond to news about future taxes even before the rates change? To answer these questions, this paper uses novel historical high-frequency data of tax-exempt municipal bonds and develops a model of the term structure of municipal yield spreads to taxable bonds as a function of future top income tax rates and a risk premium. Testing the model using the presidential elections of 1980, 1992 and 2000 shows that financial markets forecast future tax reforms remarkably well in both the short and long run. Combining these market-based tax expectations or "tax news shocks" with data from the Consumer Expenditure Survey shows strong evidence of anticipation effects to future tax changes among higher-income consumers, well before the tax rates change. Consumer spending changes about one-for-one with changes in expected lifetime tax liabilities. These findings imply that ignoring anticipation effects can substantially bias estimates of the total effect of a tax change.

Note: This video shows the evolution of the path of market-based expected tax rates from the beginning of the Carter administration in January 1977 through the first year of the Reagan administration. With a forecast horizon of 1 to 15 years, the movie shows when markets begin to anticipate the Reagan tax cuts, and how persistent they expect these tax shocks to be. The paths of expected tax rates are calculated from the term structure of yield spreads between Treasury and municipal bonds between 1/1977 and 8/1982. The time series of the actual effective top 1% tax rate (i.e., the perfect foresight tax rate) is based on Saez (2004). [Note: If you cannot see the movie you can download the file here.]

ABSTRACT: The taxation of fixed-income securities is complex, but important for understanding the pricing of bonds. This short primer explains what researchers who are interested in bond pricing should know about the taxation of fixed-income securities. The different tax rules since 1970 are formalized within a simple asset pricing framework.

ABSTRACT: What determines the life-cycle of businesses? Exploiting unique firm-level panel data on internal organization and innovation we establish three key sets of stylized facts to inform recent theories of firm life-cycles. First, life-cycle effects are driven by startups, not by new establishments of existing firms. Second, organizational restructuring and innovation are both strongly correlated with firm growth but not with firm age, in contrast to passive learning theories of firm dynamics. Third, there are important sectoral differences in innovation activities which are monotonically increasing in firm size for manufacturing firms but hump-shaped for firms in service industries.

- Renting Hedges Wage Risk (with Lee Lockwood, Pinchuan Ong, and Scott Baker).
[Abstract].

ABSTRACT: Homeowners and renters have mirror-image exposures to the considerable volatility in housing costs. The welfare effects of these exposures depend on their correlations with the rest of household portfolios. Using 70 years of data on local markets in the U.S., we find that rents and home prices are strongly positively correlated with wages at all horizons. As a result, wage risk is hedged by renting and exacerbated by owning. These interactions with wage risk are strong enough that for many households, renting is not only safer than owning, it is safer than full housing insurance. This highlights an important cost of owner-occupied housing and the many major policies that encourage it.

- Undiversified Real Estate Investors and Endogenous House Prices (with Charles Nathanson)

ABSTRACT: This paper uses the unique institutional setting of Swiss cantons from 1872 to 1881 to study the note-issuing behavior of private banks in a free banking system. I find that these banks over-issue notes, in contrast to recent literature on free banking in the United States in the 19th century such Bodenhorn and Haupert (1996). This new conclusion results from measuring two additional determinants of note-issuing that have previously been ignored: the average withdrawals from deposit accounts, and the interest rate paid on those deposit accounts. Controlling for these two variables reveals that the expected return on note-issuing exceeds the returns on deposit creation. Therefore, banks issued too many notes, failing to take into account the negative externality imposed on other issuing banks by the increased transaction costs that result from the larger flow of species and by the effect on the exchange rate volatility.

- Discussion of Imelda, Anna Lou Abatayo, and Budy Ressosudarmo, "Prepayment, Price, and Welfare: A Study on Electricity Demand in Indonesia," 8th Zurich Conference on Public Finance in Developing Countries, Zurich Switzerland, December 2023.