EUI - Essays in Household Finance

The broad topic of this project relates to the behavior of Norwegian households in labor and financial markets. In the first chapter I seek to understand household's decision to participate in financial markets, and how households decide upon the riskines s of their financial portfolio over the life cycle. From the empirical side I provide tangible evidence towards two stylized facts, namely the hump- shaped pattern of asset market participation and the decreasing pattern of households portfolio riskiness along the life cycle. I propose a life-cycle model, which jointly accounts for the behavior of asset market participation and for the risky share of household's portfolio.. In the second chapter I investigate the extent to which Norwegian households decum ulate their financial wealth in the years after job loss in order to smooth consumption. To identify the causal effect of job loss on asset holdings, we control for household and year fixed effects, and exploit job losses that occur in the course of major plant downsizings. We find that the average household replaces only about 20% of its missing income from savings, but there is great heterogeneity. We proceed to explore a number of possible determinants of this ratio, and find prominent roles for the pr ogressive tax system and for prior savings. The latter supports the view that a subset of households is liquidity constrained. These are in particular the young. Drops in permanent income and longer spell length by contrast are not found to impair the use of private wealth. In a third chapter (still in progress) I investigate possible liquidity constraints for households during unemployment. The literature has interpreted the prolonged unemployment duration caused by unemployment benefits as a pure Moral Hazard.