Disentangling Financial Constraints, Precautionary Savings, and Myopia: Household Behavior Surrounding Federal Tax Returns
Charles A. Dice Center Working Paper No. 2013-20
42 Pages Posted: 22 Dec 2013 Last revised: 23 Dec 2013
Date Written: December 20, 2013
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: Suggested Citation