Abstract: We study the role of housing wealth for the financing of retirement consumption, focusing on the design of the financial products that allow households to tap into their home equity. Our model results show that bequest and precautionary savings motives have difficulty generating the high homeownership rates late in life observed in U.S. data. In an attempt to match the data we consider two model features: (i) retirees value property maintenance less than potential buyers of the property; (ii) for psychological reasons, retirees derive utility from remaining in the same house. We show that for these retirees reverse mortgages can be beneficial, but the insurance provided by the government agency can induce excessive moral hazard from borrowers and lenders. We use our model to evaluate different mechanisms for limiting moral hazard, and at the same time designing the loans in a way that they can be beneficial to retirees.
Bio: João Cocco is Professor of Finance at London Business School, a Research Fellow of the Centre for Economic Policy Research, a fellow of the Center for Financial Studies, and a Research Fellow of Netspar, the Network for Studies on Pensions, Aging and Retirement. He holds a M.A. and a Ph. D. degree in economics from Harvard University. João has carried out research on a wide range of topics, including banking, corporate governance, asset allocation, real estate finance, and pensions. His research has appeared in top finance and economics journals including the Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Quarterly Journal of Economics, Journal of Monetary Economics, among others. His work has also been featured in leading newspapers and magazines, including: The Financial Times, The Times, Actuary, Pensions Week, among others. João is an accomplished teacher, who has won a number of teaching awards. He currently teaches Corporate Finance and Real Estate Finance at London Business School. João has held several consulting posts. He is Editorial Board Member of the Review of Financial Studies and of the Journal of Pension Economics and Finance.
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