Abstract: Vesting requirements are a common yet understudied feature of defined-contribution retirement plans. Using administrative recordkeeping data, we find that 30% of separations occur during participants’ vesting periods. The resulting forfeitures of employer contributions are
concentrated among lower-income participants and make the distribution of 401(k) compensation significantly more regressive. Firms do not enjoy offsetting efficiency benefits: employing both cross-plan and within-plan identification strategies, we find no evidence that vesting exerts a causal retention effect. A linked survey shows informational frictions to be a key mechanism, as a majority of respondents do not know their current plan’s vesting rules.
Discussant: Bronson Argyle, Brigham Young University
Abstract: Tax incentives on financial activities have a major impact on the U.S. government budget and currently amount to $1 trillion in foregone tax revenue per year. Motivated by this fact, this paper uses a novel empirical framework to study the role of fiscal policy as a driver of capital flows in financial markets, the cost and supply of financial products, and asset prices. Using fiscal reforms that shifted household demand for financial products, I document a large and persistent response of capital flows to tax incentives, accounting for up to 53% of the long-term growth of aggregate financial sectors. These shifts in capital allocation have persistent effects on the cross-section of asset prices, with securities that are held relatively more by subsidized institutions outperforming by 13 percentage points in the three years post-reform. The tax savings introduced by fiscal reforms, however, do not entirely accrue to households, as financial institutions retain up to 21% of these savings by increasing the cost of their products when market entry is limited. Given the large response of capital flows to tax incentives, I then investigate whether this response differs across individual U.S. households. I find that fiscal policy carries substantial distributional effects, which tend to benefit wealthier households. Having access to sophisticated advisors, ultra-high-net-worth households are significantly more responsive to tax incentives and earn a tax alpha of 50 bps annually relative to less-wealthy households. Overall, these findings highlight the importance of fiscal policy in shaping financial markets, with wealthier households benefiting from tax incentives more than less-wealthy households.
Discussant: Marco Grotteria, London Business School
David Schoenherr, Seoul National University Business School
Abstract: In this paper, we present a Savings-and-Credit Contract (SCC) design that mandates a savings period with a default penalty before providing credit. We demonstrate that SCCs mitigate adverse selection and can outperform traditional loan contracts amidst information frictions, thereby expanding access to credit. Empirical evidence from a financial product incorporating an SCC design supports our theory. While appearing riskier on observables, we observe lower realized default rates for product participants than for bank borrowers. Further consistent with the theory, a reform that reduces the default penalty during the savings period induces worse selection and higher realized default rates.
Discussant: Benjamin Iverson, Brigham Young University
