Basit Zafar

How do College Students Form Expectations

Because students rely on their subjective expectations when choosing a college major, understanding this process of expectations formation is crucial for education policy recommendations. This paper focuses on how college students form expectations about various major-specific outcomes. I collect a unique panel data set of Northwestern University undergraduates that contains their subjective expectations about major-specific outcomes. Although students tend to be overconfident about their future academic performance, I find that they revise their expectations about various major-specific outcomes in systematic ways. For example, students who receive extremely positive information about their ability revise upward their prediction for short-term grade-point average (GPA). Similarly, those who receive very negative information revise downward their beliefs about GPA. Furthermore, students seem to update their probabilistic beliefs in a manner consistent with Bayesian analysis: Prior beliefs about outcomes to be realized in college tend to be fairly precise, while new information influences prior beliefs about outcomes in the workplace. Moreover, students who are more uncertain about major-specific outcomes in the initial survey make greater absolute revisions in their beliefs in the follow-up survey. Finally, I present evidence that learning plays a role in the decision to switch majors. Negative revisions to beliefs about graduating in four years, enjoying coursework, and earning an expected salary are associated with dropping a major.

INFLATION EXPECTATIONS AND BEHAVIOR: DO SURVEY RESPONDENTS ACT ON THEIR BELIEFS?

We compare the inflation expectations reported by consumers in a survey with their behavior in a financially incentivized investment experiment. The survey is found to be informative in the sense that the beliefs reported by the respondents are correlated with their choices in the experiment. More importantly, we find evidence that most respondents act on their inflation expectations showing patterns consistent with economic theory. Respondents whose behavior cannot be rationalized tend to have lower education and lower numeracy and financial literacy. These findings help confirm the relevance of inflation expectations surveys and provide support to the microfoundations of modern macroeconomic models.

How do College Students Respond to Public Information about Earnings

Expectations are important determinants of decisions made under uncertainty, and if individuals’ expectations are biased, they can make suboptimal choices. This paper uses a unique “information” experiment in which we provide college students true information about the population distribution of earnings. We find that college students are substantially misinformed about population earnings and revise their earnings beliefs in a sensible way in response to the information. The specificity and informativeness of the signal matters for updating. There is, however, substantial heterogeneity in students’ updating heuristics. We also find that students revise their intended major in response to the information.

Financial Education and the Debt Behavior of the Young

More than three-quarters of U.S. households bear consumer debt, yet we have little understanding of the relationship between financial education and the debt behavior of U.S. consumers. In this paper, we study the effects of exposure to financial training on debt outcomes in early adulthood. Identification comes from variation in financial literacy, economics, and mathematics course offerings and graduation requirements mandated over the 1990s and 2000s by state-level high-school curricula. The FRBNY Consumer Credit Panel provides debt outcomes based on quarterly Equifax credit reports from 1999 to 2012. Our analysis, based on a flexible event-study approach, reveals significant effects of financial education on debt-related outcomes of youth. On the extensive margin, financial literacy education has a sizable impact on the propensity of youth having a credit report. Conditional on having a credit report, on the intensive margin, math and financial literacy education exposure reduces the incidence of adverse outcomes – such as accounts in collections and delinquent accounts – and reduces both the likelihood of youth carrying debt and their average debt balances. The net effect of both math and financial literacy education is an increase in youths’ average creditworthiness, as measured by the Equifax risk score. On the other hand, economic education increases the likelihood of individuals carrying balances, leads to significant increases in debt balances – in particular, debt used to support consumption – and, at the same time, increases the likelihood of adverse credit outcomes, leading to a decline in youths’ average risk scores. The effects of these financial education policies accumulate over the course of early adulthood. Our results suggest that financial education programs, increasingly promoted by policymakers, are likely to have significant impacts on the financial decision-making of youth, but the effects depend on the content of these programs.

Stereotypes and Madrassas: Experimental Evidence from Pakistan

Madrassas (Islamic religious seminaries) have been alleged to be responsible for fostering Islamic extremism and violence, and for indoctrinating their students in narrow worldviews. However, very little is known about the behavior of Madrassa students, and how other groups in their communities interact with them. To investigate this, the authors use unique experimental and survey data that they collected in Madrassas and other educational institutions in Pakistan. They randomly match male students from institutions of three distinct religious tendencies and socioeconomic background—Madrassas, Islamic Universities, and Liberal Universities—and observe their actions in several experiments of economic decision-making. First, they find a high level of trust among all groups, with students enrolled at Madrassas being the most trusting and exhibiting the highest level of unconditional other-regarding behavior. Second, within each group, they fail to find evidence of in-group bias or systematic out-group bias either in trust or tastes. These findings cast doubt on the general perception that Madrassas teach hatred and narrow worldviews. Third, they find that students of Liberal Universities underestimate the trustworthiness of Madrassa students, suggesting that an important segment of the society has mistaken stereotypes about students in religious seminaries.

The Impact of Housing Markets on Consumer Debt: Credit Report Evidence from 1999 to 2012

We investigate the impact of large swings in the housing market on nonmortgage borrowing, including student, credit card, auto, and home equity debts. For this purpose, we use CoreLogic geographic house price variation, matched with rich data on consumer liabilities from the Equifax-sourced FRBNY Consumer Credit Panel. The length and timing of our panel allow us to study the consumer debt portfolio response to house price changes during a boom-and-bust cycle of historic magnitude as well as during more ordinary times. In first-differenced instrumental variables estimation, we find that during 1999-2001, homeowners substituted out of nonhousing (largely credit card) debt and into home equity-based debt at a nearly dollar-for-dollar rate in response to house price increases. During the housing boom of 2002-06, however, homeowners abandoned the practice of substituting into less costly debt as equity grew, and instead increased obligations across the board. From 2007-12, sample homeowners experienced a 23 percent average house price decline, and withdrew from home equity debt without adding to non-housing debt. We observe substantial heterogeneity in this pattern: Substitution in both 1999-2001 and 2007-12 ranges from 50 cents to more than dollar-for-dollar for older and prime borrowers, while the decidedly nonprime borrow more modestly, show less evidence of substitution, and shed large amounts of all types of debt from 2007-12. Finally, difference-in-differences and FD-IV estimates are consistent with both 1) a 2012 relative debt overhang of at least

Gender Discrimination and Social Identity: Experimental Evidence from Urban Pakistan

1,800 on average, despite little remaining home equity advantage, for homeowners who experienced a more pronounced boom-and-bust cycle and 2) little substitution out of home equity debt into student loans in response to recent house price declines.

University Choice: The Role of Expected Earnings, Non-pecuniary Outcomes, and Financial Constraints

Gender discrimination in South Asia is a well-documented fact. However, gender is only one of an individual’s many identities. This paper investigates how gender discrimination depends on the social identities of interacting parties. We use an experimental approach to identify gender discrimination by randomly matching 2,836 male and female students pursuing bachelor’s-equivalent degrees in three different types of institutions — Madrassas (religious seminaries), Islamic universities, and liberal universities — that represent distinct identities within the Pakistani society. Our main finding is that gender discrimination is not uniform in intensity and nature across the educated Pakistani society and varies as a function of the social identity of both individuals who interact. While we find no evidence of higher-socioeconomic-status men discriminating against women, men of lower socioeconomic status and higher religiosity tend to discriminate against women — but only women of lower socioeconomic status who are closest to them in social distance. Moreover, this discrimination is largely taste-based. Our findings suggest that social policies aimed at empowering women need to account for the intersectionality of gender with social identity.

The Sensitivity of Housing Demand to Financing Conditions: Evidence from a Survey

We investigate the determinants of students? university choice, with a focus on expected monetary returns, non-pecuniary factors enjoyed at school, and financial constraints, in the Pakistani context. To mitigate the identification problem concerning the separation of preferences, expectations, and markets constraints, we combine rich data on individual-specific subjective expectations about labor market and non-pecuniary outcomes, with direct measures of financial constraints and students? stated school choice both with and without financial constraints. Estimates from a life-cycle model show that future earnings play a small (but statistically significant) role. However, non-pecuniary features, such as a school?s ideology, are major determinants. Data on students? choices without financial constraints allow for the out-of-sample validation of the model, which shows a strikingly good fit. Our results demonstrate that 37 percent of students are financially constrained in their choice of university, and that implementing policies relaxing financial constraints would increase students? average lifetime subjective expected utility by 21 percent. From a methodological standpoint, we find that ignoring non-pecuniary factors, uncertainty related to employment and drop-out, or direct measures of financial constraints yields biased estimates?a result that underscores the importance of having data on these elements for understanding university choice in any context.

Do We Follow Others When We Should Outside the Lab? Evidence from the AP Top 25

The sensitivity of housing demand to mortgage rates and available leverage is key to understanding the effect of monetary and macroprudential policies on the housing market. However, since there is generally no exogenous variation in these variables that is independent of confounding factors (such as economic conditions or household characteristics), it is difficult to cleanly estimate these sensitivities empirically. We circumvent these issues by designing a strategic survey in which respondents are asked for their willingness to pay (WTP) for a home comparable to their current one, under different financing scenarios. We vary mortgage rates, down payment constraints, and non-housing wealth. We find that a relaxation of down payment constraints, or an exogenous increase in non-housing wealth, has large effects on WTP, especially for relatively poorer and more credit-constrained borrowers. On the other hand, changing the mortgage rate by 2 percentage points only changes WTP by about 5 percent on average. These findings have implications for theoretical models of house price determination, as well as for policy.