Brian Melzer's Home Page

Brian T. Melzer Assistant Professor Finance Department Kellogg School of Management, Northwestern University b-melzer@kellogg.northwestern.edu Curriculum vitae

Fields of Research and Teaching Interest:

Financial Institutions, household finance, corporate finance

Published Papers:

The Real Costs of Credit Access: Evidence from the Payday Lending Market, Quarterly Journal of Economics, forthcoming.

ABSTRACT: I estimate the real effects of credit access among low-income households by exploiting geographic and temporal variation in the availability of payday loans. Payday loans, which are small, short-term consumer loans that carry comparatively high interest rates, constitute the marginal source of credit for many high risk borrowers. I find no evidence that payday loans alleviate economic hardship. To the contrary, I find that loan access leads to increased difficulty paying mortgage, rent and utilities bills, and delay of needed health care. The empirical design isolates variation in loan access that is uninfluenced by lenders' location decisions and state regulatory decisions, two factors that might otherwise correlate with economic hardship measures. Through further analysis of differences in loan access – over time and across income groups – I rule out a number of alternative explanations for the estimated effects. Counter to the view that improving credit access facilitates important expenditures, the empirical results suggest that for some low-income households the debt service burden imposed by borrowing inhibits their ability to pay important bills.

Working Papers:

Competition and Adverse Selection in a Consumer Loan Market: The Curious Case of Overdraft vs. Payday Credit, with Donald P. Morgan, February 2010 (Revise and Resumbit at Review of Financial Studies).

ABSTRACT: We document a case of price-increasing competition; banks and other depository institutions charge more for overdraft credit and are less likely to offer free checking when payday credit is available. We attribute this rise in prices to adverse selection created by the flat fee pricing of overdraft credit. That pricing favors depositors prone to large overdrafts, so when payday credit (priced per dollar borrowed) is available, depositors prone to small overdrafts switch. That selection works against banks; large overdrafts cost more to supply and, if depositors default, banks lose more, so prices rise. Consistent with this adverse selection hypothesis, we document that the average dollar amount per returned check at depository institutions increases when depositors have access to payday credit. Our findings illuminate competition and pricing frictions in the large, yet largely unstudied, small dollar loan market.

Mortgage Debt Overhang: Reduced Investment by Homeowners with Negative Equity, August 2010.

ABSTRACT: Homeowners with negative equity have less incentive to invest in their property. They face a debt overhang: in expectation, some value created by equity investments in the property will go to the lender. Using rich microdata on household expenditures, I show that debt overhang plays an important role in household financial decisions. I find that homeowners with negative equity cut back substantially on mortgage principal payments, home improvements and home maintenance spending. At the same time, these households show no difference in durable spending on automobiles, furniture and home appliances, investments that are not attached to the home. The decline in mortgage principal payments is particularly large for negative equity homeowners in non-recourse states, where strategic default is more likely because lenders have limited claim on non-housing wealth. Debt overhang, rather than financial constraints, best explains this set of facts. Given the prevalence of negative home equity in today’s housing market, the results suggest that home prices will grow more slowly in the future because of underinvestment. In addition, the potential deadweight loss due to home foreclosures is only part of the economic inefficiency that follows the spree of mortgage borrowing in the 2000s and the subsequent real estate price decline.