Exploring Household Finance

Tuck associate professor Brian Melzer studies household finance, in particular household borrowing, housing investments, financial advice, and consumer financial regulation. While the area is now a mainstream topic in finance, it wasn’t always that way. Melzer was one of the early economists to focus on it.

Melzer was first drawn to household finance in the early 2000s, when he worked as a research analyst covering financial services companies. One day, he listened to a presentation by a payday lender and pawn shop company his firm was analyzing. The company specialized in high interest rate consumer loans for people who didn’t have access to conventional bank credit. I was fascinated by what drove them to borrow and why they didn’t have other, cheaper options, Melzer says. It struck me that I’d love to go back and study these things. A few years later, Melzer began a PhD program at the University of Chicago, focusing on the nascent area of household finance. He taught at the Kellogg School of Management from 2008 to 2017, and in 2018 he joined the Finance faculty at Tuck, where he teaches the Real Estate elective. 

The following is an edited and condensed conversation with Melzer on the basics of household finance, based on a recent keynote address he gave at the 28th Annual Conference of the German Finance Association. 

What is household finance?

I think of it as the study of household financial behavior. It encompasses a few important dimensions: studying the consequences of household financial decisions, the quality of those decisions (are they making good choices that allow them to grow their wealth over time and avoid high-cost borrowing?), and the factors that shape their decisions. It also includes how financial intermediaries like banks and advisors interact with households and provide the financial services people are using to accomplish their goals, and the regulations and policies that govern those interactions. 

When did household finance research start taking off?

There were a handful of professors working on this in the mid-1990s, and something like 30 scholarly articles published per year on household finance in the early 2000s. In the past few years top-30 business schools hired more than 25 recent PhD graduates who listed household finance as an area of research interest, and there are more than 200 household finance-related journal articles published every year. 

What have been the catalysts for growth in the field?

A big one on the asset side is the move toward defined contribution retirement savings (such as 401ks), and away from defined benefit pension programs. What that does is put the household in charge of investment choices that used to be made by a professional pension fund manager. That’s been going on for a long time, but there are more and more assets being guided by the household that used to be guided by an outside expert. That’s why financial intermediaries are really important. 

On the borrowing side, the financial crisis was a really big catalyst for growth of research in this area. It used to be that macroeconomists didn’t think so much about the financial sector: the role banks were playing or the role access to credit played within household consumption decisions. But all of a sudden it became clear that the withdrawal of credit, and the overhang of leverage and financial distress related to past borrowing was having really meaningful aggregate macroeconomic impacts.

What are the future research opportunities in household finance?

Some of the tailwinds have abated. The financial crisis is far behind us, and the growth of data has slowed down. But the need for research in this area will continue because there are some new catalysts. The development of financial technology has been a big driver in changing the way households interact with financial markets. Robo-advising and automated investment strategies that take the human out of the process or change the way they fit into that process have been an interesting change, and an important one to study.

Furthermore, the growth in machine learning techniques as a way to gather data and model it and make predictions—I think that’s really important for credit underwriting and the provision of credit. There’s been an interesting tension there, between allowing for innovation and making sure the innovation doesn’t run afoul of fair credit laws.

What are you working on these days?

My research lately has gone in two directions: banking regulations and the gig economy. I have a new working paper on bank overdraft price restrictions and their effect on the unbanked, finding that banks are more willing to provide accounts to low-income households when they were free to charge higher overdraft fees. In another working paper, we study the rise of the gig economy and its sometime deleterious effects on access to credit for gig workers.