Gene Amromin
Federal Reserve Bank of Chicago
Contents
Personal Information
Financial
Economist, Payments Research Group
Economic
Research Department, Federal Reserve Bank of Chicago
230 S. LaSalle Street, Chicago, IL 60604
Email: gamromin@frbchi.org, Phone: 312-322-5368, Fax: 312-322-6003
Areas of Interest:
Household financial decision-making, retirement savings, payment choices,
taxation and corporate finance
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Publications
Abstract: Many
households face the trade-off between paying an extra dollar off the remaining
mortgage on their house and saving that extra dollar in tax-deferred accounts
(TDAs) used for retirement. We show that, under certain conditions, it becomes
a tax arbitrage to reduce mortgage prepayments and to increase TDA
contributions because of the tax-deductibility of mortgage interest and
tax-exemption of qualified retirement savings. Using data from the Survey of Consumer
Finances, we document that a significant number of households that are
accelerating their mortgage payments instead of saving in a TDA forgo a
profitable tax arbitrage opportunity. Finally, we show empirically that this
inefficient behavior is unlikely to be driven by liquidity or other financial
constraints. Rather, the observed behavior can be attributed to a certain
extent to the reluctance of many households to participate in financial markets
as either lenders or borrowers.
Abstract: This paper provides a survey
of existing literature on portfolio allocations in conventional and
tax-deferred investment habitats. A
long-standing puzzle in this literature has been the dissonance between the
theoretical prediction of tax-efficient portfolio choices and observed
portfolio allocations. I clarify this
prediction and offer a different perspective by emphasizing the importance of
uninsurable labor income risk and restrictions on accessibility of tax-deferred
assets. I identify the key factors in
dual-habitat portfolio decisions and highlight the necessary ingredients for
producing non-tax-efficient, or precautionary, allocations.
Abstract: This
study explores two effects of employee stock options on tax incentives to issue
debt. The deduction of option exercise gains
from taxable income creates a non-debt tax shield, reducing the incentive to
issue debt. In contrast, the grant of
options also creates a demand for hedging unexpected stock price increases, and
firms have a tax-based incentive to hedge by borrowing to repurchase
shares. Empirical tests for a sample of
large S&P 500 firms from 1995 to 2001 present evidence consistent with both
effects, and the increase in debt through hedging more than offsets the effect
from reducing marginal tax rates for high tax rate firms.
Abstract: We use
data from a ten-year panel of individual tax returns to investigate the
circumstances under which households choose to incur a 10% penalty in order to
gain early access to retirement accounts.
We attempt to link the likelihood of early withdrawals to shocks
experienced by households at the time of withdrawal and to the availability of
non-retirement assets. Our findings
indicate that penalized withdrawals are significantly more likely among households
that experience adverse shocks, and that the effect of shocks is amplified for
households with low levels of non-retirement financial wealth. In particular, we find that job loss, income
shocks, divorce, and home purchases increase the likelihood of early ESP
withdrawals by an average of 3 to 10 points each, with significantly stronger
increases among the poorest households.
We conclude that a significant portion of early withdrawals from
retirement accounts reflects consumption-smoothing behavior by
liquidity-constrained households who experience financial shocks, rather than
squandering of pension assets.
Working papers
How
did the 2003 Dividend Tax Cut Affect Stock Prices?, joint with Paul Harrison and Steven Sharpe, May
2007 (under review)
Abstract: We test
the hypothesis that the 2003 dividend tax cut boosted U.S. stock prices and
thus lowered the cost of equity. Using an
event-study methodology, we attempt to identify an aggregate stock market
effect by comparing the behavior of U.S. common stock prices to that of foreign
equities and real estate investment trusts.
We also examine the relative cross-sectional response of prices of high-
and low-dividend paying stocks. We do
not find any imprint of the dividend tax cut news on the value of the aggregate
U.S. stock market. On the other hand, high-dividend
stocks outperformed low-dividend stocks by a few percentage points over the
event windows, suggesting that the tax cut may have induced asset reallocation
within equity portfolios. Finally, the
positive abnormal returns on non-dividend paying U.S. stocks in 2003 do not
appear to be tied to tax-cut news.
Abstract: Tax
efficiency is the dominant consideration in theoretical portfolio models that
allow for both taxable and tax-deferred accounts (TDAs). Investors are advised to locate higher-tax
assets in their tax-deferred accounts, which in the Unites States commonly
translates into “holding bonds inside TDAs and holding equities outside.” Yet, observed portfolio allocations are not
tax-efficient. This paper empirically
evaluates the predictions of a recent model designed to bridge the existing gap
by explicitly incorporating uninsurable labor income risk and limited
accessibility of TDA assets in household decisions (Amromin, 2003). Together, these elements create tension
between household’s desire to maintain tax-efficient allocations and its
concern over the need to make costly TDA withdrawals in the event of bad income
draws. This leads some
borrowing-constrained households facing labor income risk and TDA access
penalties to forgo tax-efficiency in favor of allocations that provide more
liquidity in bad income states – an outcome labeled as “precautionary portfolio
choice”. The empirical results based on
household-level portfolio data from the Survey of Consumer Finances provide
evidence that both the choice of whether to hold a tax-efficient portfolio and
the degree of portfolio tax-inefficiency are related to the presence and
severity of precautionary motives.
Abstract: We use
data obtained from a series of Michigan Surveys of Consumer Attitudes to study
stock market beliefs and portfolio choices of individual investors. We find that expected returns over the
medium- and long-term horizon appear to be extrapolated from past realized
returns. The findings also indicate
that a more optimistic assessment of macroeconomic conditions coincides with
higher expected returns and lower
expected volatility, implying strongly procyclical Sharpe ratios. These results are given added credence by the
empirical finding that reported portfolio concentrations in equities tend to be
higher for respondents who anticipate higher returns and lower uncertainty. Overall, our empirical results lend support
to the hypothesis that equity valuations are lower during recessions – and
subsequent returns are higher – because of undue pessimism about future
returns, rather than high risk aversion.
Transforming
Payment Choices by Doubling Cash Fees on the Illinois Tollway, joint with Carrie Jankowski and Richard D.
Porter
Abstract: New
technologies offer the possibility of innovative remedies to congestion problems
facing cities throughout the country.
Successful implementation of technology-based policies depends
critically on devising optimal pricing schemes, taking into account network
adoption dynamics, and consumer acceptance of the technology itself. This paper studies the effectiveness of a
particular application of pricing incentives in conjunction with a
mass-marketing campaign to foster adoption of electronic toll collection. Notably, merely prompting the switch to
electronic payments shares many of the same challenges of the more radical
congestion-relief initiatives, such as variable pricing and transition to
private ownership. We use data provided
by the Illinois Tollway to show that a substantial change in relative prices generated a large aggregate
response, even though the increase in tolls constituted a rather small change
in overall commuting costs. We also
argue that the large relative price change allowed the Tollway to resolve a
difficult coordination problem of convincing motorists to adopt electronic
payment in exchange for a benefit that could be realized only if enough other
motorists were also convinced. Moreover,
we show that the aggregate effect of the price change masks interesting heterogeneity
in motorists’ responses. Whereas
decisions of lower-income households were affected by price pressures, affluent
households responded more to lowering the fixed costs of acquiring payment
transponders. We also show that social
network effects played a significant role in propagating the adoption. The results can be helpful in designing
effective ways to implement various congestion-relief policies.
Debit Card and
Cash Usage: A Cross-Country Analysis, joint with Sujit Chakravorti
Abstract: During the
last decade, debit card transactions grew rapidly in most advanced countries.
While check usage declined and has almost disappeared in some countries, the
stock of currency in circulation has not declined as fast. We use panel
estimation techniques to analyze the change in transactional demand for cash
resulting from greater usage of debit cards in 13 countries from 1988 to 2003.
We are able to disentangle cash's store of value function from its payment
function by separating cash into three denomination categories. We find that
the demand for low denomination notes and coins decreases as debit card usage
increases because merchants need to make less change for customer purchases. On
the other hand, the demand for high denomination notes is generally less
affected suggesting that these denomination notes are also used for
non-transactional purposes.
Curriculum Vitae (pdf)
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Links
Survey of
Consumer Finances
Michigan Survey of Consumer Sentiment,
Chicago
Fed Research Department
Board of Governors
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Last revised: June 5, 2007