Erzo F. P. Luttmer

Dartmouth College, Hanover, New Hampshire, United States

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Publications (46)8.34 Total impact

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    ABSTRACT: This paper provides experimental evidence that individuals have difficulty valuing annuities, and this difficulty – rather than a preference for lump sums – can help explain observed low levels of annuity purchases. Although the median price at which people are willing to sell an annuity is close to median actuarial values, this masks notable heterogeneity in responses including substantial numbers of respondents whose responses are difficult to reconcile with optimizing behavior under any reasonable parameter assumptions. We also discover that people are willing to pay substantially less to buy a larger annuity, a result not due to liquidity constraints or endowment effects. Strikingly, we also learn that individual responses to the buy versus sell decisions are negatively correlated, an effect that is stronger for the less financially sophisticated. Our findings are consistent with boundedly rational consumers who adopt a “buy low, sell high” heuristic when faced with a complex trade-off. Moreover, at the margin, subjective valuations vary nearly one-for-one with actuarial values but are uncorrelated with utility-based measures designed to measure the insurance value of annuities. This supports the hypothesis that people use simplifying heuristics to think about annuities, rather than engaging in optimizing behavior. Results also underscore the difficulty of explaining the cross-sectional variation in annuity valuations using standard empirical models. Our findings raise doubt about whether most consumers can make optimal decisions about annuitization.
    03/2013;
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    ABSTRACT: We investigate how the link between individual schooling and political participation is affected by country characteristics. Using individual survey data, we find that political participation is more responsive to schooling in land-abundant countries, and less responsive in human capital-abundant countries, even while controlling for country political institutions and cultural attitudes. We also find related evidence that political participation is less responsive to schooling in countries with a higher skill premium, suggesting that these patterns are influenced by the opportunity cost of engaging in political rather than production activities. We therefore propose an explanation that centers on an allocation decision that individuals face over the use of their human capital. In our model, a relative abundance of land (used primarily in the least skill-intensive sector) or a scarcity of aggregate human capital increases both the level of political participation and its responsiveness to schooling. We show in an extension how this framework can provide a joint explanation for patterns of political participation at the individual level and differences in public investment in education at the country level.
    Review of Economics and Statistics - REV ECON STATIST. 01/2012;
  • Jeffrey B. Liebman, Erzo F.P. Luttmer
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    ABSTRACT: No abstract available.
    NBER/Tax Policy and the Economy 11/2011;
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    Jeffrey B. Liebman, Erzo F. P. Luttmer
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    ABSTRACT: This paper presents the results of a field experiment in which a sample of older workers was randomized between a treatment group that was given information about key Social Security provisions and a control group that was not. The experiment was designed to examine whether it is possible to affect individual behavior using a relatively inexpensive informational intervention about the provisions of a public program and to explore the mechanisms underlying the behavior change. We find that our relatively mild intervention (sending an informational brochure and an invitation to a web-tutorial) increased labor force participation one year later by 4 percentage points relative to the control group mean of 74 percent and that this effect is driven by a 7.2 percentage point increase among female subjects. In addition to affecting actual labor supply behavior, the information intervention increased survey measures of the perceived returns to working longer, especially among female respondents.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
    08/2011;
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    ABSTRACT: No abstract available.
    NBER Book Chapters. 06/2011;
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    Lex Borghans, Anne C. Gielen, Erzo F. P. Luttmer
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    ABSTRACT: In this paper, we exploit a cohort discontinuity in the stringency of the 1993 Dutch disability reforms to obtain causal estimates of the effects of decreased generosity of disability insurance (DI) on behavior of existing DI recipients. We find evidence of substantial “social support substitution”: individuals on average offset a euro of lost DI benefits by collecting 31 cents more from other social assistance programs. This benefit-substitution effect declines somewhat over time, but is still a significant 20% eight years later. Individuals also exhibit a strong rebound in earnings: labor earnings increase by 62 cents on average per euro of lost DI benefits. This is novel evidence of substantial remaining earnings capacity in a sample of long-term claimants of DI. On average, individuals make up for almost the entire DI benefit reduction through increases in other forms of social assistance and in labor earnings.
    01/2011;
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    Christina M. Fong, Erzo F.P. Luttmer
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    ABSTRACT: We present a dictator game experiment where the recipients are local charities that serve the poor. Donors consist of approximately 1000 participants from a nationally representative sample. We manipulate the perceived worthiness and race of the charities' recipients with an audiovisual presentation. Respondents then decide how much to give to the charities and report their perceptions of recipient worthiness and racial composition. We have four main findings. First, treatments describing recipients as worthy significantly increase giving. Second, the treatment where respondents viewed photos mostly of the black recipients rather than white recipients had no significant effect on giving, even though it successfully manipulated perceptions of racial composition. Third, we find significant racial bias in perceptions of worthiness; the black picture treatment lowers perceived recipient worthiness significantly more among non-black respondents than among black respondents. Finally, we decompose the reduced-form effect of the black picture treatment on giving into two channels: one operating via perceptions of recipient worthiness and one running through perceptions of recipient racial composition. The worthiness perceptions channel is statistically significant, while the race perceptions channel is not. Thus, racially biased worthiness perceptions have a significant effect on giving but this effect is not strong enough to cause a significant reduced-form effect of the black picture treatment on giving.
    Journal of Public Economics. 01/2011; 95(5-6):372-394.
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    ABSTRACT: The sharpest increase in U.S. home ownership over the last century occurred between 1940 and 1960, driven largely by a decrease in the age at first ownership. To shed light on the contribution of several coincident large-scale government interventions in housing finance, I examine veter-ans' home loan benefits provided under the postwar GI Bills. I apply a regression discontinuity design to two breaks in the probability of military service by date of birth, for cohorts coming of age at the end of World War II and the Korean War, to estimate the impact of veteran status on home ownership. I find significant, positive effects of veteran status on home ownership in 1960. Consistent with a model in which the impact of easier loan terms declines with age, these effects are larger for younger veterans, and diminish in 1970 and 1980 as the cohorts age. Complementary analyses suggest veterans' non-housing benefits and military service itself are unlikely to explain the observed differences in home ownership. I find suggestive evidence that allowing earlier home purchase led to earlier family formation, and that veterans' housing ben-efits encouraged suburbanization. My baseline estimates imply that veterans' housing benefits can explain approximately 10 percent of the increase in aggregate home ownership from 1940 to 1960., and numerous seminar participants at Harvard University. I am especially indebted to Edward Glaeser, Claudia Goldin, and Lawrence Katz for detailed feedback. I also gratefully acknowledge financial support from the Taubman Center for State and Local Government and the Real Estate Academic Initiative. All errors are my own.
    02/2010;
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    Hilary W. Hoynes, Erzo F.P. Luttmer
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    ABSTRACT: This paper estimates the effective total value that individuals derive from their state's tax-and-transfer program, and shows how this value varies by income. The paper decomposes this total value into two components: redistributive value, which is due to predictable changes in income (and family circumstances), and insurance value, which occurs when taxes and transfers compensate for unexpected income shocks. Our approach is a forward-looking one, where we examine income and transfers net of taxes over a 10-year period. We model state taxes (personal income taxes, the EITC, and sales taxes) and state means-tested transfers (AFDC/TANF and Medicaid/SCHIP). The calculations are made using the Panel Study of Income Dynamics and allow for analysis of the determinants of changes in the value of state net benefits over a more than 30 year period. We find that the redistributive value of state tax-and-transfer programs sharply declines with income, but that the insurance value of transfers is increasing in income. The resulting effective total value is positive across the income distribution and is relatively flat across income groups. This latter finding may explain why mobility does not “undo” state redistributive spending.
    National Bureau of Economic Research, Inc, NBER Working Papers. 01/2010;
  • Rajkamal Iyer, Asim Ijaz Khwaja, Erzo F. P. Luttmer, Kelly Shue
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    ABSTRACT: The recent banking crisis highlights the challenges faced in credit intermediation. New online peer-to-peer lending markets offer opportunities to examine lending models that primarily cater to small borrowers and that generate more types of information on which to screen. This paper evaluates screening in a peer-to-peer market where lenders observe both standard financial information and soft, or nonstandard, information about borrower quality. Our methodology takes advantage of the fact that while lenders do not observe a borrower’s exact credit score, we do. We find that lenders are able to predict default with 45% greater accuracy than what is achievable based on just the borrower’s credit score, the traditional measure of creditworthiness used by banks. We further find that lenders effectively use nonstandard or soft information and that such information is relatively more important when screening borrowers of lower credit quality. In addition to estimating the overall inference of creditworthiness, we also find that lenders infer a third of the variation in the dimension of creditworthiness that is captured by the credit score. This credit-score inference relies primarily upon standard hard information, but still draws relatively more from softer or less standard information when screening lower-quality borrowers. Our results highlight the importance of screening mechanisms that rely on soft information, especially in settings targeted at smaller borrowers.
    08/2009;
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    ABSTRACT: The degree to which the Social Security tax distorts labor supply decisions depends on the extent to which individuals recognize that future benefits are based on how much they worked. To measure the perceived linkage between labor supply and Social Security benefits, we administer a survey about the Social Security benefit rules to a representative sample of Americans aged 50-70. We find that the majority of respondents believe that their Social Security benefits increase with labor supply, i.e., that the Social Security benefit rules provide a positive work incentive. The magnitude of this perceived incentive varies across respondents, but people generally cite an incentive that is somewhat greater than the actual figure. We also surveyed people about their understanding of various provisions in the Social Security benefit rules. We find that some of these provisions (e.g., effects of delayed benefit claiming, and rules on widow benefits) are relatively well understood while others (rules on spousal benefits, provisions on which years of earnings are taken into account) are less well understood.
    05/2009;
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    ABSTRACT: If the marginal utility of consumption depends on health status, this will affect the economic analysis of a number of central problems in public finance, including the optimal structure of health insurance and optimal life cycle savings. In this paper, we describe the promises and challenges of various approaches to estimating the effect of health on the marginal utility of consumption. Our basic conclusion is that while none of these approaches is a panacea, many offer the potential to shed important insights on the nature of health state dependence.
    02/2009;
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    Erzo F.P. Luttmer, Kelly Shue
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    ABSTRACT: If voters have negligible cognition costs, ballot layout should not affect election outcomes. We explore deviations from rational voting using quasi-random variation in candidate name placement on ballots from the 2003 California recall election. We find that minor candidates' vote shares almost double when their names are adjacent to the names of major candidates. All else equal, vote share gains are larger in precincts with higher percentages of poorly educated, poor, or third-party voters. A major candidate that disproportionally attracts voters from such precincts faces an electoral disadvantage. We also explore which voting technology platforms and brands mitigate misvoting. (JEL D72)
    American Economic Journal Economic Policy 02/2009; 1(1):229-57.
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    Rajkamal Iyer, Asim Ijaz Khwaja, Erzo F. P. Luttmer, Kelly Shue
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    ABSTRACT: ABSTRACT : This paper looks at how well Finland performs in high growth entrepreneurship and uses data from the Global Entrepreneurship monitor to benchmark Finland against other European countries. It is found that Finland’s prevalence rate of high growth entrepreneurial activity lags significantly behind most of its European and all of its Scandinavian peers. That this weak performance in high-growth entrepreneurship goes hand in hand with Finland being a world leader in per capita investment in R&D may be described as a paradox. The reasons underlying the underperformance of Finland remain however unclear. At this point, explanations should be sought in culture, industrial traditions and systemic experience in high growth entrepreneurship.
    Harvard University, John F. Kennedy School of Government, Working Paper Series. 01/2009;
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    Jeffrey B. Liebman, Erzo F.P. Luttmer, David G. Seif
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    ABSTRACT: A key question for Social Security reform is whether workers currently perceive the link on the margin between the Social Security taxes they pay and the Social Security benefits they will receive. We estimate the effects of the marginal Social Security benefits that accrue with additional earnings on three measures of labor supply: retirement, hours, and labor earnings. We develop a new approach to identifying these incentive effects by exploiting five provisions in the Social Security benefit rules that generate discontinuities in marginal benefits or non-linearities in marginal benefits that converge to discontinuities as uncertainty about the future is resolved. We find clear evidence that individuals approaching retirement (age 52 and older) respond to the Social Security tax-benefit link on the extensive margin of their labor supply decisions: we estimate that a 10 percent increase in the net-of-tax share reduces the two-year retirement hazard by a statistically significant 2.1 percentage points from a base rate of 15 percent. The evidence with regards to labor supply responses on the intensive margin is more mixed: we estimate that the elasticity of hours with respect to the net-of-tax share is 0.41 and statistically significant, but we do not find a statistically significant earnings elasticity.
    01/2009;
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    Christina M. Fong, Erzo F. P. Luttmer
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    ABSTRACT: Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
    Harvard University, John F. Kennedy School of Government, Working Paper Series. 01/2009;
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    Erzo F.P. Luttmer, Christina M. Fong
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    ABSTRACT: We investigate the role of racial group loyalty on generosity in a broadly representative sample of the US adult population. We use an audiovisual presentation to manipulate beliefs about the race, income, and worthiness of Hurricane Katrina victims. Respondents then decide how to divide $100 between themselves and Katrina victims. We find no effects of victims' race on giving on average. However, respondents who report feeling close to their racial or ethnic group give substantially more when victims are of the same race, while respondents who do not feel close to their group give substantially less. (JEL D64, J15, Q54)
    American Economic Journal Applied Economics 01/2009; 1(2):64-87. · 2.76 Impact Factor
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    ABSTRACT: This paper uses a comprehensive set of internal bribery records from an Asian trading firm to document pervasive corruption in government procurement and evaluate different auction regimes. The average bribe was 14.7% of the product cost during the 1997-2001 period when auctions were not mandatory. To fight corruption, the country mandated best-value auctions in 2001, and strengthened them to more transparent, best-price auctions in 2004 (Best-value auctions compare bids' weighted sums of price and subjective quality scores; best-price auctions compare only prices subject to meeting a minimum quality threshold.) I find that best-value auctions did not reduce corruption and even increased it when buyers could select which vendors to solicit. In contrast, best-price auctions decreased corruption significantly as they limited officials' discretion in evaluating bids. Further, this paper reveals the widespread practice of secret auctions employed by corrupt officials to identify the largest bribe-payers, who were also the most efficient firms. As formal auctions became mandatory, highly corrupt officials strategically discontinued secret auctions to prevent firms from preparing for formal auctions, thereby giving contracts to less efficient firms. Overall, these results indicate that open and non-discretionary auctions can significantly reduce corruption, but at some cost to allocative efficiency.
    12/2008;
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    ABSTRACT: We estimate how the marginal utility of consumption varies with health. To do so, we develop a simple model in which the impact of health on the marginal utility of consumption can be estimated from data on permanent income, health, and utility proxies. We estimate the model using the Health and Retirement Study’s panel data on the elderly and near-elderly, and proxy for utility with measures of subjective well-being. We find robust evidence that the marginal utility of consumption declines as health deteriorates. Our central estimate is that a one-standard¬deviation increase in the number of chronic diseases is associated with an 11 percent decline in the marginal utility of consumption relative to this marginal utility when the individual has no chronic diseases. The 95 percent confidence interval allows us to reject declines in marginal utility of less than 2 percent or more than 17 percent. Point estimates from a wide range of alternative specifications tend to lie within this confidence interval. We present some simple, illustrative calibration results that suggest that state dependence of the magnitude we estimate can have a substantial effect on important economic problems such as the optimal level of health insurance benefits and the optimal level of life-cycle savings.
    Journal of the European Economic Association 07/2008; · 1.36 Impact Factor
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    ABSTRACT: I examine the impact of taxation on family labor supply and test economic models of the family by analyzing responses to the Tax Reform of 1991 in Sweden, known as the "tax reform of the century" because of its large magnitude. Using detailed administrative panel data on approximately 11% of the married Swedish population, I …nd that husbands and wives react substantially to their own marginal tax rates and to their spouses'rates. The estimates imply that husbands'leisure and wives'leisure are complements in the full sample. I test and reject a set of models in which the family maximizes a single utility function. The standard econometric labor supply speci…cation, in which one spouse reacts to the other spouse's income as if it were unearned income, yields biased coe¢ cient estimates. Uncompensated labor supply elasticities are over-estimated by a factor of more than three, and income e¤ects are of the wrong sign. Overall, the results suggest that there is interplay between spouses' labor supply decisions, and that taking account of this joint aspect of their decision-making leads to new conclusions about labor supply responses to taxation.
    04/2008;

Publication Stats

1k Citations
8.34 Total Impact Points

Institutions

  • 1997–2013
    • Dartmouth College
      • Department of Economics
      Hanover, New Hampshire, United States
  • 2012
    • Singapore Management University
      • School of Economics
      Singapore, Singapore
  • 2011
    • Carnegie Mellon University
      • Department of Social and Decision Sciences
      Pittsburgh, PA, United States
  • 2007–2008
    • Harvard University
      Cambridge, Massachusetts, United States
  • 2006
    • Stockholm University
      • Institute for International Economic Studies (IIES)
      Stockholm, Stockholm, Sweden
  • 2005
    • Tufts University
      Georgia, United States