MPC Heterogeneity and Household Balance Sheets
American Economic Journal: Macroeconomics
vol. 13,
no. 4, October 2021
(pp. 1-54)
Abstract
We use sizable lottery prizes in Norwegian administrative panel data to explore how transitory income shocks are spent and saved over time and how households' marginal propensities to consume (MPCs) vary with household characteristics and shock size. We find that spending peaks in the year of winning and gradually reverts to normal within five years. Controlling for all items on households' balance sheets and characteristics such as education and income, it is the amount won, age, and liquid assets that vary systematically with MPCs. Low-liquidity winners of the smallest prizes (around US$1,500) are estimated to spend all within the year of winning. The corresponding estimate for high-liquidity winners of large prizes (US$8,300–150,000) is slightly below one-half. While conventional models will struggle to account for such high MPC levels, we show that a two-asset life cycle model with a realistic earnings profile and a luxury bequest motive can account for both the time profile of consumption responses and their systematic covariation with observables.Citation
Fagereng, Andreas, Martin B. Holm, and Gisle J. Natvik. 2021. "MPC Heterogeneity and Household Balance Sheets." American Economic Journal: Macroeconomics, 13 (4): 1-54. DOI: 10.1257/mac.20190211Additional Materials
JEL Classification
- D12 Consumer Economics: Empirical Analysis
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- E21 Macroeconomics: Consumption; Saving; Wealth
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
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