Conference Research Recap: How Can Markets Address Issues of Inequality?
The rise in inequality over recent decades has been thoroughly documented. The shrinking middle class, decreased economic mobility and the stagnating purchasing power of the minimum wage have all contributed to increased divides between income strata across society. Yet even as the existence of the issue becomes more firmly established, little progress has been made toward successfully addressing the problem. A variety of public policy proposals have been touted, but political gridlock makes action increasingly difficult.
The Kenan Institute and UNC Kenan-Flagler Business School’s inaugural Conference on Market-Based Solutions for Reducing Wealth Inequality, held June 1-2 in Chapel Hill, N.C., highlighted research on market mechanisms that might also work to ameliorate inequality. The conference featured a wide selection of academic and industry perspectives, as well as views from the business and nonprofit spheres in the city of Durham, with the goal of connecting the insights generated by researchers with on-the-ground knowledge.
Below, we provide a recap of the academic papers presented and the major takeaways from each. The research sections of the conference were divided into four panels, each of which cover different drivers of inequality or opportunities to address it: home ownership and housing, firms and entrepreneurship, financial services, and education and financial decision-making. To access the papers and view the full agenda, please see the conference website.
Home Ownership, Mortgages and Inequality
Adam Jørring, Boston College assistant professor of finance, began the first session by presenting the paper “Do Mortgage Lenders Compete Locally? Implications for Credit Access,” co-authored with Greg Buchak, Stanford University assistant professor of finance. Given that differences in real estate ownership are a major contributor to the racial wealth gap, the authors are interested in examining obstacles to credit access in particular markets and the extent to which these obstacles exacerbate inequality. Buchak and Jørring find that in markets with a higher concentration of mortgage lenders, noninterest fees and rejection rates are higher – even though borrowers in these markets tend to be less risky, on average. This finding contradicts the conventional wisdom that lender concentration has no impact on mortgage prices and credit access. The reduced credit access particularly affects low-income, female and racial minority borrowers, indicating that high levels of lender concentration can have a particularly deleterious effect on these groups’ income mobility.
Pierre Mabille, INSEAD assistant professor of finance, presented the second paper in this panel, “Financial Constraints and the Racial Housing Gap,” which he co-authored alongside Arpit Gupta, NYU Stern associate professor, and Christopher Hansman, Imperial College London assistant professor of finance. In examining the racial housing gap, the authors document a leverage gap between Black and white households; in 2020, more than 50% of white households put at least 10% down for a new mortgage, compared with less than 20% of Black households. The authors contend that this stems from the type of financing each group generally relies upon; white households more frequently are able to use family wealth, while Black households are more likely to rely upon loans from the Federal Housing Administration. These FHA loans can be used only for houses up to a certain monetary value, which further fuels cyclical inequality. The paper concludes with a number of policy experiments, the most notable finding from which is that policies should focus on increasing Black households’ ability to move to high-opportunity geographic areas rather than merely targeting homeownership outright.
Firms, Pay and Entrepreneurship
UNC Kenan-Flagler Professor of Finance and Kenan Institute Research Director Paige Ouimet presented her paper “Firms with Benefits? Nonwage Compensation and Implications for Firms and Labor Markets,” which she co-authored with the University of Maryland’s Geoffrey A. Tate. The paper (which we covered in greater detail in a Kenan Insight) examines the role of nonwage benefits and how these benefits factor into total compensation inequality. Broadly speaking, the authors document that benefits vary much more widely across firms than do wages; within firms, benefits are much more standardized. In addition, high-wage workers are far more likely to receive generous benefit packages. Together, these findings indicate that income inequality understates the actual amount of inequality, since nonwage benefits contribute to overall compensation disparities.
Xiang Li, a Ph.D. student in finance at Boston College, also presented his job market paper “Bank Competition and Entrepreneurial Gaps: Evidence from Bank Deregulation.” Li is interested in mechanisms that might decrease racial and gender gaps in entrepreneurship; to that end, he finds that stronger bank competition – and less regulation – increases the quantity and quality of banking services provided to minority borrowers. Women and minority entrepreneurs are subsequently able to access a greater level of capital for their ventures, which leads Li to conclude that decreased bank regulation also decreases the above gaps in entrepreneurial activity.
Bank Access and Fintech Innovation
How does physical proximity to bank branches affect access to financial services? In “Bank Branch Access: Evidence from Geolocation Data,” co-authors Jung Sakong, an economist at the Federal Reserve Bank of Chicago, and Alexander K. Zentefis, assistant professor at the Yale School of Management, use approaches from spatial economics to parse this question in greater detail. Sakong and Zentefis use geolocation data to estimate a measure of consumers’ ability to access quality banking services, hypothesizing that this may explain why low-income and minority individuals visit bank branches less frequently. They find that Black individuals reside farther from physical bank branches and thus lack equal access to financial services.
The other paper on this panel, “To Pay or Autopay? Fintech Innovation and Credit Card Payments,” looks at the impact of digital – rather than physical – banking. Author Jialan Wang, assistant professor of finance at the University of Illinois at Urbana-Champaign, investigates credit card autopay, which is frequently instituted for cardholders at the time of opening an account. While autopay increases the likelihood of making the minimum payment on a credit card, it also significantly decreases the average payment amount made by consumers on their credit card. More broadly, the paper demonstrates the extent to which small technological advances can have disproportionately large effects on the larger financial system.
Education, Information and Wealth Inequality
The fourth and final panel kicked off with a paper analyzing the impact of a business school education on graduates’ investment decisions. Authored by the Stockholm School of Economics’ Adam Altmejd, Seriges Riksbank adviser Thomas Jansson and Yigitican Karabulut, associate professor of finance at the Frankfurt School of Finance and Management, the study of Swedish students found that a business education leads to larger investments in stocks and 1.2% greater annual portfolio returns, as opposed to students who majored in other disciplines. While the effect is insignificant over the medium run, the authors theorize that financial literacy may depreciate over time or, alternatively, that the knowledge gap between those with and without formal education in finance may decrease as the latter group gains work experience. In addition, the effects are only operative for those with less financially literate parents, providing evidence that a business school education is most useful as a replacement for those without family knowledge of finance. However, the findings are robust to a number of controls, providing (as presenter Karabulut put it) “an excellent argument for the benefits of a business school education.” The last paper to be presented was Menaka V. Hampole’s “Financial Frictions and Human Capital Investments,” which was based around a novel, comprehensive dataset that merged college student records with later career data. Hampole, a Ph.D. candidate in finance at Northwestern’s Kellogg School of Management, was interested in understanding the impact of student debt and how the prospect of repaying this debt factored into students’ later career choices. She found that students with less debt have lower initial but higher mean lifetime earnings; students with more debt, by contrast, tended to choose careers with high initial income that earned less over time. The effect is strongest for low- and middle-income students, demonstrating the disproportionate effect that student debt plays in shaping later life outcomes.
