Adair Morse’s work in economics began when she was fresh out of college. After graduating from Colgate University in 1990, she moved to Poland to teach English. Instead, she wound up starting a business. Poland had just embarked on its rapid transformation to a capitalist economy and at the age of 21, Morse became not just an observer, but also a participant in this radical change. She started a company manufacturing leather goods and began to learn first-hand about the power and responsibility of being an employer. All of her employees had worked in state enterprise up until the transition and for many, her business was their first experience in private enterprise.
“There I was, at 21,” she recollects, laughing, “and of course I don’t know anything at 21.” But she paid in U.S. dollars, which gave her employees a secure footing in a shifting economy. Before her time in Poland, she cared about poverty and fairness in the abstract, but her experience there sharpened both her understanding of economic insecurity and her commitment to addressing it in practical ways.
She brought this commitment back to the United States, where she soon realized that the corporate world was not the right place for her to address problems of poverty and fairness. Working as a controller for a waste management company, Morse noticed that a large chunk of the employees’ paychecks would go to paying fees and interest for services like check cashing and payday loans, “your heart just sinks when to realize the extent to which financial services do not cater to many people.” For Morse, figuring out how to better structure business practices is not a matter of paternalism or beneficence, but rather simple fairness, “in finance there’s a lot of unfairness and corruption and just leveling the playing field can improve the lives of many, many, people, even though it may be through small changes.”
In graduate school, Morse began to address one of the problems that she first noticed in her time as an entrepreneur. Issues of household finance, and particularly the sorts of financial tools that people living paycheck to paycheck rely on, such as payday loans, was central to her work from the very beginning. It was not a given, however, that academic finance would be more receptive to these concerns than the private sector had been. “When I started doing this research,” Morse recounts, “academic finance research typically studied capital markets and big corporations, but there was not much attention paid to average households.” Morse has helped to change this, garnering both numerous academic prizes and also influencing legislation both in the United States and abroad.
Starting in graduate school, Morse conducted two studies on payday lenders. As she demonstrates in her paper, “Payday Lenders: Heroes or Villains?” (Journal of Financial Economics, 2011) part of addressing such financial practices in a rigorous way means adding nuance to how we ethically judge them. Payday lenders draw a great deal of condemnation, but in fact they are a symptom of a much larger problem of financial inequality rather than its cause. Morse demonstrates that in some cases, for people who are not served by traditional financial institutions, payday lenders can offer the bridge financing they need in emergencies. Morse found that the existence of payday lenders mitigated the number of foreclosures in areas hit by natural disasters. The findings are not a celebration of payday lenders, but rather an indication of how few financial options exist for people living in economic precarity. As Morse puts it, “this does not mean, of course, that payday lenders are optimal. But say your car breaks down and you need to drive to work, a payday lender may be your only option to keep your job. Taking away this possibility of bridge finance means taking away possibilities from people who need them most.” Instead of getting rid of services like these, Morse wants to find ways to improve and better regulate them.
Working with a national payday lender, Morse and Marianne Bertrand conducted a second research project in which lenders provided additional financial disclosures including month to month budgeting plans showing exactly how much borrowers would be paying in fees on their loan. Morse and Bertrand found that receiving this information at the same time as the loan led borrowers to repay their loans more quickly and to be less likely to take out loans in the future. Morse and Bertrand’s paper, “Information Disclosure, Cognitive Biases, and Payday Borrowing,” was the lead article in the Journal of Finance (December 2011) and was awarded the journal’s Brattle Prize for best paper in corporate finance. Both the state of Texas and province of Ontario adopted and mandated the disclosures used in this project for payday lenders, impacting an estimated four million borrowers annually. The implications of this research also goes beyond payday lending specifically and speaks to even bigger questions about the role that regulators can play in ensuring financial literacy. While there has been a push to incorporate financial literacy programs into public schools, Morse and Bertrand’s study shows that people learn in the process of using financial institutions and educating people at the point of those transactions can be more effective.
Leveling the financial playing field is both a question of studying the finances of those on the bottom and corrupt practices of those on top. In addition to her work on lower and middle income household finances, Morse develops innovative ways to trace and expose fraud, corruption, and unethical practices on the part of individuals, corporations, and even the Federal Reserve.
Working with Margarita Tsoutsoura and Nikos Artavanis, Morse conducted a highly influential study of tax evasion in Greece. She and her co-authors discovered that banks were offering loans to people that could not be supported by the reported, taxable income of those individuals. They found that the banking industry had its own set of multipliers to estimate actual income based on reported income and occupation. Working with a large Greek bank, they were able both to discover the prevalence of tax evasion, particularly among highly educated upper class professionals, as well as to develop a new method of estimating actual incomes in a semiformal economy. This paper, “Measuring Income Tax Evasion using Bank Credit: Evidence from Greece,” won the 2013 WFA/WRDS Prize for best empirical paper and was published in the Quarterly Journal of Economics in 2016. It was widely covered in the Greek and international media, contributing significantly to an outcry against tax evasion which resulted in parliamentary tax reforms.
While Morse’s work on payday lending and tax evasion has supported regulatory changes, her works has also revealed how federal and regulatory agencies can be at times ineffective at stemming corruption, and indeed even complicit in it. One key problem with leveling the playing field is the closeness of individuals within public financial institutions like the Fed with private investors. Morse and her co-authors Anna Cieslak and Annette Vissing-Jørgensen found correspondences between stock performance and the meetings of the Fed’s Board of Governors, suggesting that information from these meetings is leaked to financial markets through channels like newsletters that charge subscribers high fees for access to private information about these meetings. Their paper, “Stock Returns over the FOMC Cycle,” was named the best conference paper at the 2015 Sonoran Finance Conference and has serious implications for how we understand communication between the Fed and investors. The problem of Federal Reserve leaks was recently brought into the spotlight with the resignation of Federal Reserve Bank of Richmond President Jeffrey Lacker. The problem though, Morse and co-authors argue, is more far reaching than one individual. The members of the Federal Reserve are, as Morse puts it, “supposed to be our public servants, and what we are seeing here is a scandal in progress that we’re hoping will force change in the Federal Reserve.”
In the face of complicity between public and private institutions, there is also a pressing question of how corporate fraud can be detected and regulated. Morse has looked to whistleblowers as key figures to push against fraud and corruption. Being a whistleblower, however, is easier said than done. Morse worked with Alexander Dyck and Luigi Zingales on a close study of individual cases of whistleblowers and found that whistleblowers are so rare because of the immense personal and professional cost. Whistleblowers were often ostracized by their communities because they were perceived to damage the area’s employment opportunities. They would be fired and even if their complaints were justified, other companies would refuse to hire them. Ensuring potential whistleblowers will speak up, Morse argues, requires ensuring their financial security. This finding led to the adoption of the “Bounty Provision” in the Dodd-Frank Law, that whistleblowers can claim some of the penalties that the SEC levies against the company for the fraud.
Morse prides herself more on the public policy applications of her work than on her many academic accolades and prizes. In her wide-ranging research, she follows a simple approach: “I think about things that bother me in the world. And once I think of something that’s bothering me, I try to get creative about how to remedy it in a way that can offer statistically sound research.” When it comes to teaching, she encourages her students to do the same. The most important training, she says, is “to find something that matters and that you care about, and then look to the real world to find your methods.”