Excess Sensitivity of High-Income Consumers
45 Pages Posted: 9 Jul 2015 Last revised: 24 Feb 2018
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: Suggested Citation