How Americans Respond to Idiosyncratic and Exogenous Changes in Household Wealth and Unearned Income

133 Pages Posted: 2 Jul 2021

See all articles by Magne Mogstad

Magne Mogstad

University of Chicago

Mikhail Golosov

Princeton University - Department of Economics

Michael Graber

University College London

David Novgorodsky

University of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2021

Abstract

We study how Americans respond to idiosyncratic and exogenous changes in household wealth and unearned income. Our analyses combine administrative data on U.S. lottery winners with an event-study design that exploits variation in the timing of lottery wins. Our first contribution is to estimate the earnings responses to these windfall gains, finding significant and sizable wealth and income effects. On average, an extra dollar of unearned income in a given period reduces pre-tax labor earnings by about 50 cents, decreases total labor taxes by 10 cents, and increases consumption by 60 cents. These effects are heterogeneous across the income distribution, with households in higher quartiles of the income distribution reducing their earnings by a larger amount. Our second contribution is to develop and apply a rich life-cycle model in which heterogeneous households face non-linear taxes and make earnings choices along both intensive and extensive margins. By mapping this model to our estimated earnings responses, we obtain informative bounds on the impacts of two policy reforms: an introduction of UBI and an increase in top marginal tax rates. Our last contribution is to study how additional wealth and unearned income affect a wide range of behavior, including geographic mobility and neighborhood choice, retirement decisions and labor market exit, family formation and dissolution, entry into entrepreneurship, and job-to-job mobility.

Keywords: income effects, labor supply elasticities, lottery winning, taxation, universal basic income, wealth effects

JEL Classification: D15, J22, H21, H31, H53

Suggested Citation

Mogstad, Magne and Golosov, Mikhail and Graber, Michael and Novgorodsky, David, How Americans Respond to Idiosyncratic and Exogenous Changes in Household Wealth and Unearned Income (July 1, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 76, Available at SSRN: https://ssrn.com/abstract=3878192 or http://dx.doi.org/10.2139/ssrn.3878192

Magne Mogstad (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Mikhail Golosov

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ 08544-1021
United States

Michael Graber

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

David Novgorodsky

University of Chicago

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