Working Papers

Fiduciary Duty and the Market for Financial Advice (with Vivek Bhattacharya and Gaston Illanes)

Revision requested, Econometrica
Supplementary Material
[Citations & Media: BloombergSEC2nd Circuit]

Fiduciary duty aims to solve principal-agent problems, and the United States is in the middle of a protracted debate surrounding the merits of extending it to all financial advisers. Leveraging a transaction-level dataset of deferred annuities and state-level variation in common law fiduciary duty, we find that it raises risk-adjusted returns by 25 bp. Through the lens of a model of entry and advice provision, we argue that this effect can be due to both an increase in compliance costs (a fixed cost channel) and a direct constraint on low-quality advice (an advice channel), and we show how to disentangle these two effects. Model estimates indicate that the advice channel is the dominant force in explaining the observed results, and counterfactual simulations suggest that further increases in the stringency of fiduciary duty, such as a federal fiduciary standard, will continue to improve advice.

Retirement Policy and Annuity Market Equilibria: Evidence from Chile (with Gaston Illanes)

Mandating participation in longevity insurance protects retirees from outliving their savings, but constrains consumption and bequests. We examine the Chilean pension system to study whether choice into longevity insurance increases welfare. Despite adverse selection, we find that voluntary take-up is mostly efficient and that mandatory annuitization would reduce welfare. However, a mandate increases the insurance value of the system, improving outcomes for the long lived. We trace out how mandates over a fraction of savings affect average welfare and insurance value, and show how regulators in systems with choice can modify the alternative to annuitization to improve outcomes.

State Politics and Mortgage Markets (with Brian Feinstein and Chen Meng)

This article examines whether elections for state offices that regulate mortgage lenders affect mortgage markets. Some scholars assert that election-related political uncertainty depresses economic activity; others contend that incumbents pursue policies to boost short-term growth prior to elections; and a third group claims that market activity fluctuates around partisan transitions. We test these theories using national data on mortgage characteristics and election data for two important state regulators. We first conduct event studies comparing mortgage market outcomes before and after elections. We then utilize difference-in-difference models to compare states in which partisan control of key offices switched following an election. Our results do not show consistent support for any of these theories. We find that elections have few significant effects on mortgage markets, suggesting that delegating regulatory power to elected state officials may be efficient.

Draft Available on Request:

Consumer Protection Laws and the Mortgage Market: Evidence from Ohio

Contractual Inequality