Download This PaperExcess Sensitivity of High-Income Consumers
48 Pages Posted: 9 Jul 2015 Last revised: 4 May 2020
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Excess Sensitivity of High-Income Consumers
Explaining Consumption Excess Sensitivity with Near-Rationality: Evidence from Large Predetermined Payments
Date Written: May 29, 2018
Abstract
Using new transaction data, I find considerable deviations from consumption smoothing in response to large, regular, predetermined, and salient payments from the Alaska Permanent Fund. On average, the marginal propensity to consume (MPC) is 25% for nondurables and services within one quarter of the payments. The MPC is heterogeneous, monotonically increasing with income, and the average is largely driven by high-income households with substantial amounts of liquid assets, who have MPCs above 50%. The account-level data and the properties of the payments rule out most previous explanations of excess sensitivity, including buffer stock models and rational inattention. How big are these "mistakes"? Using a sufficient statistics approach, I show that the welfare loss from excess sensitivity depends on the MPC and the relative payment size as a fraction of income. Since the lump-sum payments do not depend on income, the two statistics are negatively correlated such that the welfare losses are similar across households and small (less than 0.1% of wealth), despite the large MPCs.
Keywords: consumption excess sensitivity, MPC heterogeneity, welfare loss
JEL Classification: D12, E21, G11
Suggested Citation: Suggested Citation
Lorenz Kueng (Contact Author)
Swiss Finance Institute
c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
HOME PAGE: http://www.sfi.ch/en/