Rational Illiquidity and Consumption: Theory and Evidence from Income Tax Withholding and Refunds

Michael Gelman, Shachar Kariv, Matthew Shapiro and Dan Silverman

No 25757, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Having low liquidity and a high marginal propensity to consume (MPC) are tightly linked. This paper analyzes this linkage in the context of income tax withholding and refunds. A theory of rational cash management with income uncertainty endogenizes the relationship between illiquidity and the MPC, which accounts for the finding that households tend to spend tax refunds as if they valued liquidity, yet do not act to increase liquidity by reducing their income tax withholding. The theory is supported by individual-level evidence, including a positive correlation between the size of tax refunds and the MPC out of those refunds.

JEL-codes: D12 E21 H24 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-mac and nep-ore
Note: EFG ME PE PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Michael Gelman & Shachar Kariv & Matthew D. Shapiro & Dan Silverman, 2022. "Rational Illiquidity and Consumption: Theory and Evidence from Income Tax Withholding and Refunds," American Economic Review, vol 112(9), pages 2959-2991.

Downloads: (external link)
http://www.nber.org/papers/w25757.pdf (application/pdf)

Related works:
Journal Article: Rational Illiquidity and Consumption: Theory and Evidence from Income Tax Withholding and Refunds (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:25757

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w25757

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().