Excess Sensitivity of High-Income Consumers

46 Pages Posted: 9 Jul 2015 Last revised: 13 Aug 2018

Lorenz Kueng

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

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

Kueng, Lorenz, Excess Sensitivity of High-Income Consumers (May 29, 2018). Available at SSRN: https://ssrn.com/abstract=2627893 or http://dx.doi.org/10.2139/ssrn.2627893

Lorenz Kueng (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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