MPC Heterogeneity and Household Balance Sheets

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 US$1,500) are estimated to spend all within the year of winning. The corresponding estimate for high-liquidity winners of large prizes (US$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 covariation with observables. (JEL D12, D15, E21, G51, H24)

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Learning Your Earning: Are Labor Income Shocks Really Very Persistent?

The American Economic Review ◽

10.1257/aer.97.3.687 ◽

2007 ◽

Vol 97 (3) ◽

pp. 687-712 ◽

Cited By ~ 164

Author(s):

Fatih Guvenen

Keyword(s):

Life Cycle ◽

Current Literature ◽

Previous Literature ◽

Labor Income ◽

Income Shocks ◽

Life Cycle Model ◽

Cycle Model ◽

Consumption Data ◽

Hip Process

The current literature offers two views on the nature of the labor income process. According to the first view, individuals are subject to very persistent income shocks while facing similar life-cycle income profiles (the RIP process, Thomas MaCurdy 1982). According to the alternative, individuals are subject to shocks with modest persistence while facing individual-specific profiles (the HIP process, Lee A. Lillard and Yoram A. Weiss 1979). In this paper we study the restrictions imposed by these two processes on consumption data—in the context of a life-cycle model—to distinguish between the two views. We find that the life-cycle model with a HIP process, which has not been studied in the previous literature, is consistent with several features of consumption data, whereas the model with a RIP process is consistent with some, but not with others. We conclude that the HIP model could be a credible contender to—and along some dimensions, a more coherent alternative than—the RIP model. (JEL D83, D91, E21, J31)

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Accounting for the Rise in Consumer Bankruptcies

American Economic Journal Macroeconomics ◽

10.1257/mac.2.2.165 ◽

2010 ◽

Vol 2 (2) ◽

pp. 165-193 ◽

Cited By ~ 40

Author(s):

Igor Livshits ◽

James MacGee ◽

Michèle Tertilt

Keyword(s):

United States ◽

Life Cycle ◽

Credit Market ◽

The United States ◽

Income Shocks ◽

Life Cycle Model ◽

Cycle Model ◽

Heterogeneous Agent ◽

Working Age ◽

The Cost

Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age adults in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive lenders to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot account quantitatively for the rise in bankruptcies. Instead, the rise in filings appears mainly to reflect changes in the credit market environment: a decrease in the transaction cost of lending and in the cost of bankruptcy. We also argue that the abolition of usury laws and other legal changes were unimportant. (JEL D14, E44, G21, G28)

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