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Session Chair: Andreas Fuster, Swiss National Bank
Salience and Households' Flood Insurance Decisions
London School of Economics and Political Science, United Kingdom
Discussant: Benjamin Guin (Bank of England)
Flooding is the most costly natural disaster faced by US households, yet policymakers are puzzled by the low take-up rates for flood insurance. In this paper, I argue that households' insurance purchases are affected by the low salience of flood risk. Leveraging novel transaction-level data, I use two empirical strategies to support my hypothesis. First, I exploit a staggered campaign that publicizes already freely-available flood risk information across US counties. Insurance purchases increase by 30.6% in response, with the strongest effect in counties where the ex-ante salience of flood risk is low. Second, I exploit variation in salience induced by flood events shared through social media. Households purchase significantly more insurance after their geographically distant peers experience floods. My results suggest that behavioral frictions have a major impact on households' insurance decisions.
Know Thyself: Free Credit Reports and the Retail Mortgage Market
The Hong Kong University of Science and Technology, Hong Kong S.A.R. (China)
Discussant: Andreas Fuster (Swiss National Bank)
Under imprecise creditworthiness information, borrowers may make erroneous credit decisions. Credit reports—which record one’s creditworthiness—became free in the entire U.S. in 2005, while they already had been free in seven states. Exploiting this in a difference-in-differences setting, this paper shows that cheaper credit reports to consumers improved mortgage market outcomes. The applications, approvals and borrowing in high-creditworthy areas increased, and defaults and subprime population fraction decreased. Also, first-time homeowner proportion increased, and lenders’ financial performance improved. Additional findings, including increased interest rates, suggest a demand-driven improvement in applicant pool, as consumers receive precise creditworthiness signal from their reports.