Why Don't Households Smooth Consumption? Evidence from a 25 Million Dollar Experiment

36 Pages Posted: 20 Jul 2015

See all articles by Jonathan A. Parker

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

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Date Written: July 2015

Abstract

This paper evaluates theoretical explanations for the propensity of households to increase spending in response to the arrival of predictable, lump-sum payments, using households in the Nielsen Consumer Panel who received 25 million in randomly-distributed stimulus payments. The pattern of spending is inconsistent with models in which identical households cycle rapidly through high and low response states as they manage liquidity, but is instead highly predictable by income years before the payment. Spending responses are unrelated to expectation errors, almost unrelated to crude measures of procrastination and self-control, significantly related to sophistication and planning, and highly related to impatience.

Suggested Citation

Parker, Jonathan A., Why Don't Households Smooth Consumption? Evidence from a 25 Million Dollar Experiment (July 2015). NBER Working Paper No. w21369, Available at SSRN: https://ssrn.com/abstract=2633325

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