%I UCL (University College London)
%L discovery1324511
%A M. Angrisani
%D 2011
%O Permission for digitisation not received
%T Essays on household finance
%X This thesis comprises three essays on household finance. It provides a comprehensive
investigation of the role of heterogeneity in household circumstances to explain observed
saving and investment decisions and to define a unified analytical framework to study
such behaviours. Particular emphasis is placed on idiosyncratic, non-tradeable and non-
diversifiable risks as determinants of financial choices over the life cycle. Another salient
feature of the present contributions is their focus on retirement age individuals. In the
context of the aging population, this large cohort has received particular attention given
its relatively short retirement planning horizon, its greater vulnerability to market returns
and shocks to retirement wealth, and its rising exposure to health risk. Advancing our
understanding of middle-aged individuals' saving and investment decisions is essential
towards the design of effective interventions aimed at enhancing their financial security at
older ages.
In Chapter 1 I provide a summary and overview of the thesis.
In Chapter 2 I empirically investigate whether, when markets are incomplete, the
presence of idiosyncratic uninsurable and non-diversifiable risks induces more prudent investment strategies and causes individuals to hold safer portfolios. In particular, I consider
public pension uncertainty stemming from unexpected earnings variation as a source of
background risk for workers before retirement. I find evidence of risk substitutability, in
that individuals facing higher pension variability (background risk) reduce their exposure
to stock market risks (endogenously controlled risks).
In view of these findings, I develop in Chapter 3 a life-cycle model that reproduces
the main sources of uncertainty confronted by households on the verge of retirement.
These include unexpected earnings and pension variations, adverse health shocks, medical
expenditure risk and survival uncertainty. I use this rich analytical set-up to study optimal
retirement saving and portfolio choices and to evaluate the impact on household welfare
of tax-deferred retirement accounts. The model generates plausible wealth accumulation
and portfolio patterns. The degree of exposure to background risks, its evolution over
time and interaction with tax incentives and liquidity constraints on retirement savings
play a major role in shaping lifetime investment behaviour.
In Chapter 4 I examine the effect of cognition and numeracy on a wide range of household financial outcomes. The results suggest that the degree of sophistication required
to access more complex financial products may represent a severe barrier for less skilled
individuals and that simple preference heterogeneity is not sufficient to explain observed
differences in portfolio choice among investors with different abilities. Hence, policy interventions aimed at simplifying financial decision-making should be conceived as attempts
to address informational or market failures. Such measures might eliminate or reduce
the barriers preventing those with cognitive impairment from accessing certain investment
opportunities and attaining the desired financial security.