Camilla Skovbo Christensen defends her PhD thesis at the Department of Economics

Candidate:

Camilla Skovbo Christensen, Department of Economics, University of Copenhagen

Title:

Tax Incentives and Saving Behavior

Supervisors:

• Søren Leth-Petersen, Professor, Department of Economics, University of Copenhagen
• Claus Thustrup Kreiner, Professor, Department of Economics, University of Copenhagen

Assessment Committee:

• Torben Heien Nielsen, Professor, Department of Economics, University of Copenhagen
• Gopi Shah Goda, Senior Fellow in Economic Studies and Director of the Retirement Security Project, The Brookings Institution
• Kasper Meisner Nielsen, Professor, Department of Finance, Copenhagen Business School

Summary:

This PhD dissertation investigates how individuals adjust their saving behavior in response to changes in economic incentives and circumstances. Many governments spend substantial resources on policies that aim to encourage specific financial decisions, e.g., providing tax incentives for individuals to increase their retirement contributions. Understanding how individuals respond to changes in incentives is crucial for the design and effectiveness of such policies. Furthermore, investigating saving adjustments across different contexts is essential to uncover the factors that influence financial decision-making. This dissertation consists of three self-contained chapters on individual saving decisions in response to changes in incentives for retirement saving, mortgage refinancing, and stock market participation.

The first chapter (co-authored with Bastian Emil Ellegaard) investigates the effect of tax subsidies for retirement saving on total private saving. Previous literature suggests that tax subsidies in retirement accounts result in a shift of saving between different saving accounts at the top-end of the income distribution and are thus ineffective at impacting total saving. We exploit exogenous variation from a pension reform in Denmark that changed the tax incentives for saving in the pension scheme that holds the highest tax advantage for middle-income workers. We show that a reduction in tax subsidies for retirement saving reduces total private saving. Specifically, only 64 pct. of reduced saving in this pension scheme is substituted to other types of saving. Our results thereby imply that changes in tax subsidies can affect private saving behavior.

The second chapter (co-authored with Henrik Yde Andersen, Claus Thustrup Kreiner, and Søren Leth-Petersen) examines whether it is the same people who do not respond to changes in incentives across financial decisions. Many individuals forego substantial financial gains by not responding actively to incentives, and previous studies show that such inaction is prevalent when people face incentives to adjust their retirement savings or refinance their mortgage. We examine whether this inaction, which we label passive decision-making, is systematic across decisions. We do so in a multiple quasi-experimental setting where we measure individual-level responses to two policies that change tax incentives for retirement saving and to periods of interest rate changes that make it profitable for mortgage holders to refinance. We show that it is rarely the same people who systematically respond passively in both contexts. This suggests that passive financial decision-making is not dominated by inherent behavioral traits of the individual.

The third chapter (co-authored with Isabel Skak Olufsen) investigates the effects of cohabiting with a partner on stock market participation. We show that cohabitation increases both entry into and exit from the stock market. Those who enter the stock market are predominantly individuals who cohabit with a partner with stock market experience. Those who exit are predominantly individuals who cohabit with a partner while also becoming homeowners. Our results suggest that information spill-over within couples can increase participation, and that couples who purchase a home at cohabitation face liquidity needs and additional risk that offset the positive effects of cohabitation on stock market participation.

An electronic copy of the dissertation can be requested here: lema@econ.ku.dk