Excess Sensitivity of High-Income Consumers

45 Pages Posted: 9 Jul 2015 Last revised: 24 Feb 2018

Lorenz Kueng

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 23, 2018


Using new transaction data I find that consumption is excessively sensitive to salient, predetermined, large and regular payments from the Alaska Permanent Fund, with a large average marginal propensity to consume (MPC) of 30% for nondurables and services. This excess sensitivity is very heterogeneous: The deviation from the standard consumption model is largest for households for whom the loss from failing to smooth consumption is smallest in terms of equivalent variation. The estimated MPCs are monotonically decreasing in the loss and increasing in income for households with sufficient liquidity. I show that the economically and statistically significant excess sensitivity is consistent with households following near-rational alternative plans. For macroeconomic policies, such as an economic stimulus program, these near-rational alternatives might represent the more relevant behavior than the standard consumption model.

Keywords: consumption excess sensitivity, MPC heterogeneity, welfare loss

JEL Classification: D12, E21, G11

Suggested Citation

Kueng, Lorenz, Excess Sensitivity of High-Income Consumers (February 23, 2018). Available at SSRN: https://ssrn.com/abstract=2627893 or http://dx.doi.org/10.2139/ssrn.2627893

Lorenz Kueng (Contact Author)

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