MPC Heterogeneity and Household Balance Sheets

Andreas Fagereng, Martin B. Holm and Gisle Natvik

No 7134, CESifo Working Paper Series from CESifo

Abstract: We use sizeable 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 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 USD 1,500) are estimated to spend all within the year of winning. The corresponding estimate for high-liquidity winners of large prizes (USD 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 co-variation with observables.

Keywords: marginal propensity to consume; household heterogeneity; income shocks (search for similar items in EconPapers)
JEL-codes: D12 D14 D91 E21 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Related works:
Journal Article: MPC Heterogeneity and Household Balance Sheets (2021)
Working Paper: MPC heterogeneity and household balance sheets (2018)
Working Paper: MPC Heterogeneity and Household Balance Sheets (2017)
Working Paper: MPC heterogeneity and household balance sheets (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7134

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