You Only Lend Twice: Corporate Borrowing and Land Values in Real Estate Cycles
This paper uses a natural experiment in Japan to provide evidence of the feedback loop between corporate borrowing and commercial real estate investment emphasized in macro-finance models with collateral constraints. Japan enacted a series of reforms in the early 1980s which relaxed national regulatory constraints on the height and size of buildings. Combining originally-constructed local commercial land price indices for over 400 localities with geocoded firm balance sheets, I show that these land use deregulations generated a boom-bust cycle in corporate real estate values, borrowing, and real estate investment. Firms located in more ex ante land use constrained areas both issued more debt and invested more heavily in real estate, thus amplifying the initial positive shock to commercial real estate prices. I develop a multi-city spatial sorting model with production externalities and real estate collateral which uses the estimated reduced form effects of my local regulatory instruments on firm outcomes to assess aggregate effects of the reform. I find that the deregulatory shock to commercial real estate markets and corporate borrowing environment amplified the real estate cycle in the 1980s and led to an increased incidence of zombie lending in the 1990s.
Flip or Flop? Tobin Taxes in the Real Estate Market (slides) [submitted]
We estimate the optimal tax on property flips by applying a sufficient statistics approach to a 2011 reform in Taiwan which levied a 10%-15% surcharge on investment properties sold within two years. Linking buyer-seller income tax returns to sales records, we find a 75% drop in one-year flips. We use variation in typhoon severity to classify 20% of pre-reform sales as noisy. Combining these two parameters, the optimal tax rate is 4%, which is close to the transfer tax rates imposed in many global property markets. Segmentation and inventory shifts limit the ability of Tobin taxes to promote housing affordability.
with Shogo Sakabe
Growing spatial inequality has led policymakers to enact tax breaks to attract corporate investment and jobs to economically peripheral regions. We demonstrate the importance of multi-plant firms’ physical capital structure for the efficacy of place-based policies by studying a bonus depreciation scheme in Japan which altered the relative cost of capital across locations, offering high-tech manufacturers immediate cost deductions from their corporate income tax bill. Combining corporate balance sheets with a registry containing investment by plant location and asset type, we find the policy generated big gains in employment and investment in building construction and in machines at pre-existing production sites, with an implied fiscal cost per job created of $17,000. These responses are driven by more financially constrained firms and firms which rely on costly but long-lived capital inputs like industrial machines. The policy did not generate positive local spillovers to ineligible plants or spillovers through inter-regional trade networks. Plant-level hiring in ineligible areas outstripped that in eligible areas, suggesting firms reallocated funds from the write-offs within their internal network. How multi-plant firms react to spatially targeted tax incentives ultimately depends on their internal network and their composition of intermediate capital inputs used in production.
with Takashi Unayama
This paper documents heterogeneous spending out of a large stimulus tax rebate by exposure to the 1980s Japanese housing market turbulence. Linking geocoded household expenditure and financial transactions data to a new set of local housing price indices in Japan, we estimate a U-shaped pattern in the marginal propensity to consume with respect to housing price growth. Recipients living in areas with the smallest housing price gains during the 1980s spent 47% of the 1994 rebate within three months of payment, compared to 24% among recipients in areas which experienced the largest housing price gains. We find limited heterogeneity in marginal propensities to consume among households in less affected areas, but MPCs are higher for younger, renter households with no debt residing in more affected areas. Our results are consistent with near-rationality rather than a liquidity constraint story. Winners who are less exposed to housing risk respond more to payments, implying policies which target losers from housing market downturns may be less effective at stimulating consumption.
with Shogo Sakabe
The question of how governments should choose the frequency of payments has received little attention in the literature on the optimal design of public benefits programs. We propose a simple model in which the government chooses the length of the interval between payments, subject to a tradeoff between the administrative cost of providing more frequent benefits and the welfare gain from reducing deviations from full consumption smoothing. In our empirical application, we examine consumer and retailer responses to bimonthly payments from the Japanese National Pension System. We exploit variation in the duration of payment cycles using a unique retail dataset that links consumers to their purchase history. Our difference-in-differences style approach shows a clear spike in spending on payment dates for customers who are of retirement age relative to those who are not. While within-store average prices increase by 1.6% on payday, this effect is almost entirely due to consumers substituting towards higher quality goods rather than a retailer response. We use these reduced-form estimates to parameterize the model and conclude that the optimal frequency of Japanese public pension payments is less than one month, implying the government could improve welfare by increasing payment frequency.
Works in Progress
The Saved and the Probate: Trade-offs between Asset Control and Inheritance Tax Minimization
with Lorenzo Pessina
Microbubbles and Local Property Tax Regimes
with Takashi Unayama
Delaying the Honeymoon: The Great Decline in American Vacation