What Would You Do with $500? Spending Responses to Gains, Losses, News and Loans

65 Pages Posted: 12 Mar 2018

See all articles by Andreas Fuster

Andreas Fuster

Swiss National Bank - Financial Stability

Greg Kaplan

University of Chicago - Department of Economics

Basit Zafar

Arizona State University (ASU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2018

Abstract

We use survey questions about spending in hypothetical scenarios to investigate features of propensities to consume that are useful for distinguishing between consumption theories. We find that (i) responses to unanticipated gains are vastly heterogeneous (either zero or substantially positive); (ii) responses to losses are much larger and more widespread than responses to gains; and (iii) even those with large responses to gains do not respond to news about future gains. These three findings suggest that limited access to disposable resources is an important determinant of spending behavior. We also find that (iv) households do not respond to the offer of a one-year interest-free loan, suggesting that this is not a consequence of short-term credit constraints; and (v) people do cut spending in response to news about future losses, suggesting that neither is this a consequence of myopia. A calibrated two-asset life-cycle precautionary savings model can account for these features of propensities to consume, but cannot account for (vi) a positive extensive-margin size-effect for spending responses to gains, which suggests that non-convexities due to durability, salience or attention costs may also be important.

Suggested Citation

Fuster, Andreas and Kaplan, Greg and Zafar, Basit, What Would You Do with $500? Spending Responses to Gains, Losses, News and Loans (March 2018). NBER Working Paper No. w24386, Available at SSRN: https://ssrn.com/abstract=3138339

Andreas Fuster (Contact Author)

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

Greg Kaplan

University of Chicago - Department of Economics ( email )

1126 E. 59th St
Chicago, IL 60637
United States

Basit Zafar

Arizona State University (ASU) - Department of Economics ( email )

AZ
United States

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