Excess Sensitivity of High-Income Consumers

Lorenz Kueng

No 20-33, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Using new transaction data, I find considerable deviations from consumption smoothing in response to large, regular, predetermined, and salient payments from the Alaska Permanent Fund. On average, the marginal propensity to consume (MPC) is 25% for nondurables and services within one quarter of the payments. The MPC is heterogeneous, monotonically increasing with income, and the average is largely driven by high-income households with substantial amounts of liquid assets, who have MPCs above 50%. The account-level data and the properties of the payments rule out most previous explanations of excess sensitivity, including buffer stock models and rational inattention. How big are these "mistakes"? Using a sufficient statistics approach, I show that the welfare loss from excess sensitivity depends on the MPC and the relative payment size as a fraction of income. Since the lump-sum payments do not depend on income, the two statistics are negatively correlated such that the welfare losses are similar across households and small (less than 0.1% of wealth), despite the large MPCs.

Keywords: consumption excess sensitivity; MPC heterogeneity; welfare loss (search for similar items in EconPapers)
JEL-codes: D12 E21 G11 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2020-04
New Economics Papers: this item is included in nep-gen, nep-mac and nep-ore
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Related works:
Journal Article: Excess Sensitivity of High-Income Consumers* (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2033

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