Working Paper: CEPR ID: DP15918
Authors: Michele Andreolli; Paolo Surico
Abstract: We study the consumption response to unexpected transitory income gains of different size, using hypothetical questions from the Italian Survey of Household Income and Wealth. Families with low cash-on-hand display a higher Marginal Propensity to Consume (MPC) out of the small gains while affluent households exhibit a higher MPC out of the large gains. The spending behaviour of low-income families is consistent with the predictions of models with borrowing constraints and uninsurable income risk whereas the consumption pattern of higher earners can be accounted for by non-homothetic preferences on non-essentials. Our results suggest that, for a given level of public spending, a fiscal transfer of smaller size paid to a larger group of low-income households stimulates aggregate consumption more than a larger transfer paid to a smaller group.
Keywords: economic stimulus payment; size; MPC; heterogeneity; liquidity constraints; nonhomothetic preferences; nonessential spending
JEL Codes: D12; D14; E21; E62; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Low cash-on-hand (E41) | higher marginal propensity to consume (MPC) out of small income gains (D11) |
| Affluent households (G59) | higher marginal propensity to consume (MPC) out of large income gains (E21) |
| Higher household resources (D19) | lower marginal propensity to consume (MPC) out of small income changes (D11) |
| Affluent households (G59) | positive gradient in MPC for large income changes (E19) |
| Borrowing constraints (F34) | higher MPC out of small income gains for low-income families (H31) |
| Non-essential spending preferences (H61) | higher MPC out of large income gains for affluent households (H31) |
| Smaller fiscal transfer to larger group of low-income households (H31) | stimulate aggregate consumption more effectively (E20) |
| Liquidity constraints (E51) | higher MPC out of small income gains for low-income families (H31) |
| Higher MPCs out of large gains (E19) | concentrated in wealthier regions (D31) |
| Share of food spending on eating out (D12) | proxy for non-essential spending (H61) |
| Share of food spending on eating out (D12) | significantly correlated with higher MPCs for large income gains (D29) |