How retirement saving incentives amplify wealth gaps in the U.S.
White employees receive nearly twice as much in employer and tax subsidies for retirement saving than Black and Hispanic workers.
Faculty
Lawrence D. W. Schmidt is the Victor J. Menezes (1972) Career Development Assistant Professor of Finance. He is an an applied economist working at the intersection of finance and macro-labor.
Schmidt’s research has developed new insights about the risk exposures and decision-making processes of households, institutional investors, and financial intermediaries, and in doing so has deepened our understanding of asset prices, financial policy, and the workings of the real economy. His research to date involves two interrelated strands. The first and most active strand studies fundamental risk factors impacting the value of human capital and the causes and consequences of imperfect risk-sharing in labor and financial markets. The second strand aims to understand the underlying drivers of financial markets by focusing on the interplay between individual decision-making, strategic complementarities, and information processing frictions.
Schmidt’s research tackles these questions by a combination of quantitative models and empirical work. This work leverages, and often creates, novel microeconomic datasets, advanced econometric methods, and cutting-edge tools for textual analysis. He specializes in working large, administrative datasets capturing detailed, longitudinal information on millions of firms and workers. His work often features quantitative models that help make sense of the data and better understand financial market dynamics, evaluate welfare, and inform better economic policy.
His research has appeared in the American Economic Review, the Journal of Finance, the Review of Financial Studies, among other outlets, and his research has won multiple awards, including the 2015 AQR Top Finance Graduate Award. Schmidt holds a BA from the University of California, Santa Barbara, and PhD and MA degrees in economics from the University of California, San Diego. Prior to joining the faculty at MIT Sloan, Schmidt was an Assistant Professor in the Kenneth C. Griffin Department of Economics at the University of Chicago and a senior consultant at Navigant Consulting, Inc.
Current Research Focus—Leveraging big data to uncover the critical role of risky human capital for asset markets and the real economy: For most people, human capital—that is, the present discounted value of future labor and/or entrepreneurial income—is their most valuable asset. One focus of Schmidt's work is on quantifying downside risk exposures that workers face, understanding economic forces which generate them, and capturing how exposures to them vary across different people. For example, Schmidt's recent work shows how new technologies are linked with worker earnings risk, as well as reasons for the concentration of losses from economic downturns upon a subset of workers. Since a primary way to insure oneself against income risk is by accumulating financial wealth, his recent work builds a case for a human capital-centric view of risk and return in financial markets. Limited risk-sharing helps to explain both why stocks earn high expected returns and why these returns vary over time. His work also illustrates how increases in risk premia propagate through the labor market to endogenously generate higher income risk. It also addresses the question of why some assets earn higher average returns than others, helping to rationalize the size and value “anomalies” in stock markets. Finally, his work on income risk raises important questions about optimal design of institutions intended to promote retirement savings and investment products targeted towards households.
Featured Publication
"Climbing and Falling Off the Ladder: Asset Pricing Implications of Labor Market Event Risk."Schmidt, Lawrence D.W., MIT Sloan Working Paper 5500-16. Cambridge, MA: MIT Sloan School of Management, March 2022.
Featured Publication
"Runs on Money Market Mutual Funds."Schmidt, Lawrence D. W., Allan Timmermann, and Russ Wermers. American Economic Review Vol. 106, No. 9 (2016): 2625-2657. Author Disclosures. Appendix. Data Set.
Greig, Fiona, Anna Madamba, Guillermo Carranza, Cormac O'Dea, Taha Choukhmane, and Lawrence D.W. Schmidt, MIT Sloan Working Paper 7069-24. Cambridge, MA: MIT Sloan School of Management, June 2024.
Braxton, J. Carter, Kyle Herkenhoff, Jonathan Rothbaum, and Lawrence D.W. Schmidt, MIT Sloan Working Paper 6547-21. Cambridge, MA: MIT Sloan School of Management, December 2023.
Kogan, Leonid, Dimitris Papanikolaou, Lawrence D. W. Schmidt, and Bryan Seegmiller. NBER Working Paper 29552, Working Paper. November 2023.
Choukhmane, Taha, Jorge Colmenares, Cormac O'Dea, Jonathan Rothbaum, and Lawrence D.W. Schmidt, MIT Sloan Working Paper 6592-21. Cambridge, MA: MIT Sloan School of Management, November 2023.
White employees receive nearly twice as much in employer and tax subsidies for retirement saving than Black and Hispanic workers.
The study offers U.S. policymakers a blueprint for a future round of COVID-19 stimulus.
"The rate of early withdrawals among Black Americans is almost twice as high as among white workers. "
"It's all about how much you can afford to contribute and how much you choose to contribute."
Employer contributions add up to 24% of the wealth in retirement plans, according to assistant professor Taha Choukhmane.
"Our findings suggest that there can actually be a deterrent effect in making these accounts illiquid."