Essays on Beliefs, Incentives, and Financial Behavior

Understanding financial behavior requires understanding beliefs and incentives. This dissertation examines how changes in beliefs and incentives affect financial behavior. It consists of an introductory chapter and three independent essays on household and public finance. The first chapter provides an overview of the topic and summarizes the three essays.

In the first essay, I study how mortgage borrowers update their beliefs and adjust their financial behavior in response to rising interest rates. Combining detailed Finnish administrative mortgage data with survey-based measures of beliefs, I exploit the 2022 surge in Euribor rates, which generated both a general increase in market rates and variation in the household-specific timing of mortgage payment adjustments. Using a difference-in-differences method, I find that following the rise in interest rates, mortgage borrowers become more pessimistic about both their personal financial situation and the broader economy than homeowners without mortgages. Consistent with this larger change in sentiment, mortgage borrowers also reduce their consumption intentions and actual spending more than the control group. Importantly, these changes occur even before mortgage payments rise, indicating forward-looking behavior when financial stakes are high. These findings demonstrate that adjustable-rate mortgages serve as an important channel for monetary policy transmission and that households extrapolate personal financial shocks into broader economic pessimism.

In the second essay, I examine whether anticipating financial deterioration helps households avoid financial distress when their financial situation worsens. Using linked Finnish survey and administrative data from 2007–2018, I find that financial distress increases similarly regardless of whether households anticipated the decline. While standard models predict that foresight should mitigate distress, I find little evidence of this. Instead, rigid spending commitments such as housing costs limit households’ ability to adjust, making even anticipated shocks difficult to manage. These results suggest that anticipating financial deterioration does little to mitigate the risk of financial distress when fixed expenses dominate household budgets.

The third essay, co-authored with Jarkko Harju, Jukka Pirttilä, and Håkan Selin, examines how firms respond to changes in dividend taxation, exploiting the 2005 Finnish tax reform as a natural experiment. The reform raised dividend taxes for some firms while others faced little or no change. Using a difference-in-differences design, we find that firms facing higher dividend taxes substantially reduced their payouts but did not cut investments. The reform increased the net wealth of these firms but had no significant impact on firm survival.

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