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Income Fluctuations and Household Spending

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Hyatt Regency Chicago, Regency C
Hosted By: American Economic Association
  • Chair: Jonathan Parker, Massachusetts Institute of Technology and NBER

On Flucutations in the Sensitivity of Consumption Demand to Cash Flows: Evidence From Gas Prices

Brian Baugh
,
Ohio State University
Jonathan Parker
,
Massachusetts Institute of Technology and NBER

Abstract

How does the sensitivity of consumer demand to liquidity change over time? This paper measure<br /><br /><br />
time-variation in the spending responses of households to changes in effective cash flows using a large dataset containing every transaction into or out of linked checking, savings, and credit card accounts over 4 years. From observed spending on gasoline and its price at the state level, we calculate each household’s average weekly consumption of gasoline in gallons. From this average and state tax rates, we measure a predicted household-level change in after- gas income induced by innovations to national gas prices in every week. Controlling for the average change in spending, and thus for all channels through which gas prices might affect individuals which are uncorrelated with individual-level spending on gasoline, we estimate the partial-equilibrium impulse response of different categories of household spending to these predicted changes in effective income. We find that spending on gasoline declines over two to three weeks by 100% of the predicted change in effective income, and that spending on major categories of consumption rises to consume most of this additional cash flow over four to five weeks. Because the impulse response is primarily identified from cross-sectional variation, we characterize how the sensitivity of spending response depends on the recent history of oil price shocks and the size and sign of the change in effective cash flow. We map these changes to the changing correlation between US economic activity and gas prices during the period.

Optimal Tax Withholding With Committed Expenditure

Michael Gelman
,
University of Michigan
Shachar Kariv
,
University of California-Berkeley
Matthew Shapiro
,
University of Michigan
Dan Silverman
,
Arizona State University
Steve Tadelis
,
University of California-Berkeley

Abstract

Every year, a majority of filers receive an income tax refund, and these refunds are often large.<br />
This behavior is often seen as puzzling because it amounts to an interest free loan to the U.S. government. While such behavior can be explained by risk aversion and underwithholding penalties, individuals must be extremely risk averse to generate the types of patterns seen in the data. This paper augments a model with risk aversion and uncertainty with committed expenditures. Because committed expenditures tends to amplify local risk aversion, the model can rationalize empirical patterns of overwithholding without extreme levels of risk aversion. This paper tests the implications of the model with an administrative panel dataset on individual consumption, income, and liquid savings constructed from a personal finance app. This novel dataset allows us to test the implications of the model in a much more precise way than using standard data sets. Preliminary results indicate that consistent with the model, the size of tax refunds increases with income uncertainty and levels of committed consumption.

Explaining Consumption Excess Sensitivity With Near-Rationality: Evidence From Large Predetermined Payments

Lorenz Kueng
,
Northwestern University

Abstract

Using new transaction data I show that consumption is excessively sensitive to large, predetermined, regular, and salient payments from the Alaska Permanent Fund, with a large average marginal propensity to consume (MPC) of 30% for nondurables and services and 70% for total expenditures. This deviation from the standard inter-temporal consumption model is concentrated among households for whom the loss from failing to smooth consumption is small in terms of equivalent variation. In particular, the MPC is increasing in household income but decreasing in the size of the loss. As a result, statistically significant excess sensitivity in response to these large payments is consistent with households following near-rational alternative consumption plans. For macroeconomic policies, such as an economic stimulus program, these near-rational alternatives might be the more relevant behavior than the standard consumption model.

How Does Unemployment Affect Consumer Spending?

Peter Ganong
,
Harvard University
Pascal Noel
,
Harvard University

Abstract

We study the spending of unemployed individuals using anonymized data on 210,000 checking
accounts that received a direct deposit of unemployment insurance (UI) benefits. The account holders are similar to a representative sample of U.S. UI recipients in terms of income, spending, assets, and age. Unemployment causes a large but short-lived drop in income, generating a need for liquidity. At onset of unemployment, monthly spending drops by 6%, and work-related expenses explain one-quarter of the drop. Spending declines by less than 1% with each additional month of UI receipt. When UI benefits are exhausted, spending falls sharply by 11%. Unemployment is a good setting to test alternative models of consumption because the change in income is large. We find that families do little self-insurance before or during unemployment, in the sense that spending is very sensitive to monthly income. We compare the spending data to three benchmark models; the drop in spending from UI onset through exhaustion fits the buffer stock model well, but spending falls much more than predicted by the permanent income model and much less than the hand-to- mouth model. We identify two failures of the buffer stock model relative to the data – it predicts higher assets at onset, and it predicts that spending will evolve smoothly around the largely predictable income drop at benefit exhaustion.
Discussant(s)
James D. Hamilton
,
University of California-San Diego
Damon Jones
,
University of Chicago
Joachim Winter
,
University of Munich
Stefano DellaVigna
,
University of California-Berkeley
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy