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Disentangling Financial Constraints, Precautionary Savings, and Myopia: Household Behavior Surrounding Federal Tax Returns

Fisher College of Business Working Paper No. 2013-03-20

Charles A. Dice Center Working Paper No. 2013-20

42 Pages Posted: 22 Dec 2013 Last revised: 23 Dec 2013

Brian Baugh

Ohio State University (OSU) - Fisher College of Business

Itzhak Ben-David

Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

Hoonsuk Park

Ohio State University (OSU) - Fisher College of Business

Date Written: December 20, 2013

Abstract

We explore household consumption surrounding federal tax returns filings and refunds receipt to test various theories of consumption. Because uncertainty regarding the refund is resolved at filing, precautionary savings theory predicts an increase in consumption at this date. Contrary to this prediction, we find that households generally do not increase consumption at filing. Following the receipt of the refunds, consumption of both durables and nondurables increases dramatically and then decays quickly. Our results show that households, on average, are financially constrained, exhibit myopic behavior, and do not respond to precautionary savings motives.

Keywords: household finance, financial constraints, precautionary savings, buffer stock, myopia, tax refund, life-cycle model, permanent-income hypothesis, excess sensitivity

JEL Classification: D10, D11, D12

Suggested Citation

Baugh, Brian and Ben-David, Itzhak and Park, Hoonsuk, Disentangling Financial Constraints, Precautionary Savings, and Myopia: Household Behavior Surrounding Federal Tax Returns (December 20, 2013). Charles A. Dice Center Working Paper No. 2013-20. Available at SSRN: https://ssrn.com/abstract=2370507 or http://dx.doi.org/10.2139/ssrn.2370507

Brian Baugh

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Itzhak Ben-David (Contact Author)

Ohio State University - Fisher College of Business, Finance Department ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Hoonsuk Park

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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