Essays in Consumer Finance

This dissertation explores issues regarding the design of consumer financial contracts and their implications for market structure and economic efficiency. These questions are important because, as the recent mortgage crisis suggests, the relationship between household financial decision making, the organization of consumer financial markets, and the optimal design of financial contracts is not well understood. Chapter 2 of the dissertation uses a structural model of housing and mortgage markets to evaluate the potential impact of mortgage designs that share house price risk between the borrower and the lender. Chapter 3 of the dissertation uses a unique identification strategy to estimate the size and sources of foreclosure externalities, and Chapter 4 of the dissertation uses a theoretical model to explore the use of health contingent surrender values in life insurance contracts. The results presented in this dissertation highlight that there is much scope for improvement in the efficiency of consumer financial markets through better contract design.