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)

Do Business Booms Trigger Corruption?

In the literature, the nexus between economic growth and corruption is well covered, but there are only few studies on cyclical variations of corruption. For example, Galbraith (1997) claims that embezzlement flourishes in business booms and withers in recessions, and Gokcekus and Suzuki (2011) support the claim by finding a positive correlation between transitory income and corruption. This paper retests the argument and produces conflicting results. It is found that corruption shrinks as transitory income increases meaning that economic booms foster integrity rather than corruption. Moreover, the negative correlation is strong in high-income countries and in those with sound rule of law which points to developed countries, whereas the effect remains relatively weak in countries with low income or poor rule of law which points to developing countries. The finding is relevant also from the perspective of the European Union.

Job Displacement Insurance and (the Lack of) Consumption-Smoothing

We study the spending profile of workers who experience both a positive transitory income shock (lump-sum severance pay) and a negative permanent income shock (layoff). Using de-identified expenditure and employment data from Brazil, we show that workers increase spending at layoff by 35 percent despite experiencing a 14 percent long-term loss. We find high sensitivity of spending to cash-on-hand across consumption categories and for several sources of variation, including predictable income drops. A model with present-biased workers can rationalize our findings, and highlights the importance of the timing of benefit disbursement for the consumption-smoothing gains of job displacement insurance policies. (JEL D12, G51, J65, J63, O12)

Can Consumers Distinguish Persistent from Transitory Income Shocks?

The degree to which consumers can distinguish persistent from transitory income shocks is paramount for consumption-saving dynamics. In particular, even a small amount of imperfect information causes a severe bias in conventional estimators of the marginal propensity to consume. We provide a novel method that can identify consumers’ degree of information by using panel data on income and consumption, even allowing for measurement error. Employing our method to data from the Panel Study of Income Dynamics, we find that households have almost perfect information. This robust result indicates that the conventional estimators of the marginal propensity to consume are on firm ground.

Schooling Decisions in Indonesia: a Lesson From Indonesian Crisis

This research aims to analyze the role of income shocks, gender, and resource competition between siblings against the school's decision at the level of primary and senior secondary education during the economic crisis in Indonesia. Methods in this research were conducted in two phases, fixed effect and conditional logit. Results reveal that no evidence of households' transitory income affected children's education level, both for primary and senior secondary education. Meanwhile, compared to boys, girls have a higher probability of dropping out of school and have lower school enrollment rates in primary education. This paper indicated the existence of resource competition between the younger child and the older child for education, especially for senior secondary education.JEL Classification: I20, I24, I25, J16How to Cite:Kharisma, B., Hadiyanto, F., & Remi, S. S. (2020). Schooling Decision in Indonesia: a Lesson From Indonesian Crisis. Signifikan: Jurnal Ilmu Ekonomi, Vol. 9(1), 81-92. doi: http://dx.doi.org/10.15408/sjie.v9i1.12479.