Essays in Macroeconomics

Chapter 1 “Income Inequality, Income Mobility, and the Supply of Credit” studies a mechanism that can potentially explain the negative correlation between income inequality and intergenerational mobility in the cross-section of US commuting zones. The mechanism operates through human capital accumulation and unsecured credit. Parent income is modeled as dependent on innate ability and a random income shock. When a parent takes out a loan to finance their child's college degree, the interest rate faced by the parent depends on the default risk perceived by banks, which is greater in areas with higher local inequality due to a higher variance of the income shock. This higher cost of credit reduces investment in child human capital on the part of low-income parents and thereby can lower intergenerational income mobility. My model of human capital accumulation with unsecured credit predicts about half of the effect of income inequality on income mobility observed in the data. Chapter 2 “Classification Models: Predicting Moves with USAA Customer Data” compares three statistical models to predict residential moves using USAA customer data. Logistic regression, LASSO, and Random Forest all correctly predict moving outcome about 69% of the time in the out-of-sample test. While this accuracy is achieved with hundreds of available variables, using only five most powerful predictors reduces out-of-sample prediction accuracy by only about 1 percentage point. Age is the single strongest predictor of moving, followed by rental/homeownership information and military status. Additional local factors, such as MSA-level unemployment rate or population are found to have no impact on the likelihood of moving. To quantify the welfare effects of prohibiting universal default - one of the key provisions of the Credit CARD Act of 2009 – in Chapter 3 “Is Universal Default Socially Desirable?”, I present a model of unsecured consumer credit, with borrowers taking out two defaultable loans from different creditors, and compare social welfare when the creditors can practice universal default and when they cannot. Prohibiting universal default makes it cheaper to default on one credit card, increases bankruptcy rate, makes creditors raise interest rates, and lowers social welfare by 1.78% of lifetime consumption.