MPC Heterogeneity and Household Balance Sheets

58 Pages Posted: 27 Apr 2020

See all articles by Andreas Fagereng

Andreas Fagereng

BI Norwegian Business School; Statistics Norway

Martin Blomhoff Holm

University of Oslo

Gisle James James Natvik

BI Norwegian Business School - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: March 2020

Abstract

We use sizable lottery prizes in Norwegian administrative panel data to explore how transitory income shocks are spent and saved over time, and how households’ marginal propensities to consume (MPCs) vary with household characteristics and shock size. We find that spending peaks in the year of winning and gradually reverts to normal within five years. Controlling for all items on households’ balance sheets and characteristics such as education and income, it is the amount won, age, and liquid assets that vary systematically with MPCs. Low-liquidity winners of the smallest prizes (around USD 1,500) are estimated to spend all within the year of winning. The corresponding estimate for high-liquidity winners of large prizes (USD 8,300-150,000) is slightly below one half. While conventional models will struggle to account for such high MPC levels, we show that a two-asset life-cycle model with a realistic earnings profile and a luxury bequest motive can account for both the time profile of consumption responses and their systematic co-variation with observables.

Keywords: Marginal Propensity to Consume, Household Heterogeneity, Income Shocks, Household Finance, Balance Sheets

JEL Classification: D12, D14, D91, E21

Suggested Citation

Fagereng, Andreas and Holm, Martin Blomhoff and Natvik, Gisle James James, MPC Heterogeneity and Household Balance Sheets (March 2020). Available at SSRN: https://ssrn.com/abstract=3565994 or http://dx.doi.org/10.2139/ssrn.3565994

Andreas Fagereng (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Statistics Norway ( email )

Postboks 8131 Dep, 0033 Oslo
Oslo, Oslo 0033
Norway
+47 2109 4700 (Phone)

HOME PAGE: http://sites.google.com/site/andreasfagereng/

Martin Blomhoff Holm

University of Oslo ( email )

Moltke Moes Vei 31
Oslo, 0851
Norway

Gisle James James Natvik

BI Norwegian Business School - Department of Economics ( email )

Nydalsveien 37
Oslo, 0484
Norway

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