Working Paper: NBER ID: w28938
Authors: Orazio Attanasio; Agnes Kovacs; Patrick Moran
Abstract: We propose a rich model of household behavior to study the effect of two important policies: mortgage interest tax deduction and mandatory mortgage amortization. These policies have attracted some controversy, first because they are conceived to increase overall saving, an objective that the literature does not agree they can achieve, and second because they incentivize illiquid savings and may thus increase the share of ‘wealthy hand-to-mouth’ households. We build a life-cycle model where housing may act as a commitment device to counteract present biases arising from temptation. We show that the model matches several empirical facts, including the large share of wealthy hand-to-mouth households. We evaluate the effect of the two policies and find that they increase wealth accumulation by 7 and 10% respectively. Our results demonstrate that these policies not only induce portfolio re-balancing, as emphasized by the previous literature, but also increase savings by making commitment more accessible.
Keywords: wealth accumulation; temptation preferences; mortgage interest deduction; mandatory amortization
JEL Codes: D11; D14; D91; E21; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mortgage interest tax deduction (G21) | wealth accumulation (E21) |
| mandatory mortgage amortization (G21) | wealth accumulation (E21) |
| mortgage interest tax deduction (G21) | portfolio rebalancing (G11) |
| mandatory mortgage amortization (G21) | portfolio rebalancing (G11) |
| portfolio rebalancing (G11) | wealth accumulation (E21) |