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The Collateral Value of Housing: Evidence from Servicemember Pension Choice

46 Pages Posted: 17 Dec 2015 Last revised: 16 Jun 2017

Benjamin Bennett

Ohio State University (OSU) - Department of Finance

Radhakrishnan Gopalan

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

Thomas Andreas Maurer

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

Date Written: March 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 – have contrasting predictions about servicemember choices. 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 change in the household's implied discount rate from 8% (the average borrowing rate against future pension in our sample) to 7.4%. The effects are only present when the cost of borrowing against the house is less than the cost of borrowing against future pension benefits, among servicemembers who do not live in military housing, who have lived in the same state for an extended period of time and whose demographics indicate them to be more credit constrained and more likely to own a house. Overall, our paper provides strong evidence consistent with the collateral channel.

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 (March 2017). Available at SSRN: https://ssrn.com/abstract=2704043 or http://dx.doi.org/10.2139/ssrn.2704043

Benjamin Bennett (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://sites.google.com/site/benjaminbennettfinance/

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

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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