Federal Reserve Board of Governors
20th Street and Constitution Avenue NW
Washington, DC 20551
Institutional Affiliation: Facebook
NBER Working Papers and Publications
|February 2013||A Dynamic Model of Subprime Mortgage Default: Estimation and Policy Implications|
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The increase in defaults in the subprime mortgage market is widely held to be one of the causes behind the recent financial turmoil. Key issues of policy concern include quantifying the role of various factors, such as home price declines and loosened underwriting standards, in the recent increase in subprime defaults and predicting the effects of various policy instruments designed to mitigate default. To address these questions, we estimate a dynamic structural model of subprime borrowers' default behavior. We prove that borrowers' time preference is identified in our model and propose an easily implementable semiparametric plug-in estimator. Our results show that principal writedowns have a significant effect on borrowers' default behavior and welfare: a uniform 10% reduction in outstan...
|December 2008||An Empirical Model of Subprime Mortgage Default From 2000 to 2007|
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The turmoil that started with increased defaults in the subprime mortgage market has generated instability in the financial system around the world. To better understand the root causes of this financial instability, we quantify the relative importance of various drivers behind subprime borrowers' decision to default. In our econometric model, we allow borrowers to default either because doing so increases their lifetime wealth or because of short-term budget constraints, treating the decision as the outcome of a bivariate probit model with partial observability. We estimate our model using detailed loan-level data from LoanPerformance and the Case-Shiller home price index. According to our results, one main driver of default is the nationwide decrease in home prices. The decline in home p...
|April 2008||Nearly Optimal Pricing for Multiproduct Firms|
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In principle, a multiproduct firm can set separate prices for all possible bundled combinations of its products (i.e., "mixed bundling"). However, this is impractical for firms with more than a few products, because the number of prices increases exponentially with the number of products. In this study we show that simple pricing strategies are often nearly optimal -- i.e., with surprisingly few prices a firm can obtain 99% of the profit that would be earned by mixed bundling. Specifically, we show that bundle-size pricing -- setting prices that depend only on the size of bundle purchased -- tends to be more profitable than offering the individual products priced separately, and tends to closely approximate the profits from mixed bundling. These findings are based on an array of numerical ...