people.bu.edu/kgerardi

Research Papers

Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures (Job Market Paper)
( joint with Adam Shapiro and Paul Willen)

Abstract:

This paper provides the first rigorous assessment of the homeownership experiences of subprime borrowers. We consider homeowners who used subprime mortgages to buy their homes. Our dataset includes every mortgage, every purchase and sale, and every foreclosure in Massachusetts from 1989 to 2007. We estimate that the likelihood that a foreclosure will occur for such a borrower in the first twelve years of homeownership is about 18 percent, but that outcome depends critically on the house price appreciation experienced. For some particularly bad house price outcomes, we believe the probability of foreclosure is higher, but for good scenarios, the likelihood of foreclosure is significantly lower. Furthermore, we find that borrowers who financed their home purchase with a subprime mortgage account for approximately 30 percent of all foreclosures in the state of Massachusetts in 2006 and 2007.

Does Competition Reduce Price Discrimination? New Evidence from the Airline Industry (joint with Adam Hale Shapiro, submitted to Journal of Political Economy)

Abstract:

This paper analyzes the effects of market structure on price dispersion in the airline industry, using panel data from 1993 through 2006. Our results contrast with those of Borenstein and Rose (1994), who found that price dispersion increases with competition. We find that competition has a negative effect on price dispersion, in line with the traditional textbook treatment of price discrimination. Specifically, the effects of competition on price dispersion are most significant on routes that we identify as having consumers characterized by relatively heterogenous elasticities of demand. On routes with a more homogeneous customer base, the effects of competition on price dispersion are largely insignificant. We conclude from these results that competition acts to erode the ability of a carrier to price discriminate, resulting in reduced overall price dispersion.

Do Households Benefit from Deregulation and Financial Innovation? The Case of the Mortgage Market (joint with Harvey Rosen and Paul S. Willen, revise and resubmit to Journal of Finance)

Abstract:

The U.S. mortgage market has experienced phenomenal change over the last 35 years. Most observers believe that the deregulation of the banking industry and financial markets generally has played an important part in this transformation. This paper develops and implements a technique for assessing the impact of changes in the mortgage market on households. Our analysis is based on an implication of the permanent income hypothesis: that the higher a household’s future income, the more it desires to spend and consume, ceteris paribus. If perfect credit markets exist, then desired consumption would matche actual consumption and current spending on housing should forecast future income. Since credit market imperfections mute this effect, we can view the strength of the relationship between housing spending and future income as a measure of the “imperfectness” of mortgage markets. Thus, a natural way to determine whether mortgage market developments have actually helped households by decreasing market imperfections is to see whether this link has strengthened over time. We implement this framework using panel data going back to 1969. We find 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.

Research in Progress:

“The economics of alternative mortgages” (with Andreas Lehnert and Paul Willen)

“A new approach to thinking about housing affordability” (with Harvey Rosen and Paul Willen)

“The evolution of income volatility across generations” (with Yuping Tsai)

“The effects of the business cycle on markup variations: the case of the airline industry” (with Adam Shapiro)