The Collateral Value of Housing: Evidence from Servicemember Pension Choice

52 Pages Posted: 17 Dec 2015 Last revised: 16 Nov 2017

See all articles by Benjamin Bennett

Benjamin Bennett

Tulane University - A.B. Freeman School of Business

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Thomas Andreas Maurer

The University of Hong Kong; Washington University in St. Louis - John M. Olin Business School; London School of Economics & Political Science (LSE)

Date Written: November 1, 2017

Abstract

We evaluate the effect of house prices on U.S. military servicemember pension choices. In our setting the wealth channel – an increase in house prices increases household wealth and both current and future consumption – and the collateral channel – an increase in house prices enables the household to borrow more using housing collateral – have contrasting predictions about servicemember choices. Using state-level land supply inelasticity as an instrument for house price changes, we find that consistent with the collateral channel (and inconsistent with the wealth channel) servicemembers from states that experience house price increases are less likely to choose the pension option that provides immediate liquidity at the expense of long-term benefits. A one standard deviation increase in house prices translates into a reduction in the servicemember's implied discount rate from 8% (the average borrowing rate against future pension in our sample) to 6.3%.

Keywords: personal discount rate, time variation, macroeconomic variables, borrowing constraint, house price, collateral, housing, military pension

JEL Classification: D14, D91

Suggested Citation

Bennett, Benjamin and Gopalan, Radhakrishnan and Maurer, Thomas Andreas, The Collateral Value of Housing: Evidence from Servicemember Pension Choice (November 1, 2017). Available at SSRN: https://ssrn.com/abstract=2704043 or http://dx.doi.org/10.2139/ssrn.2704043

Benjamin Bennett (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

HOME PAGE: https://sites.google.com/site/benjaminbennettfinance/home

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Thomas Andreas Maurer

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
Hong Kong

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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