Working Paper: NBER ID: w21772
Authors: Lorenz Kueng
Abstract: Using new transaction data I find that consumption is excessively sensitive to salient, predetermined, large and regular payments from the Alaska Permanent Fund, with a large average marginal propensity to consume (MPC) of 30% for nondurables and services. This excess sensitivity is very heterogeneous: The deviation from the standard consumption model is largest for households for whom the loss from failing to smooth consumption is smallest in terms of equivalent variation. The estimated MPCs are monotonically decreasing in the loss and increasing in income for households with sufficient liquidity. I show that the economically and statistically significant excess sensitivity is consistent with households following near-rational alternative plans. For macroeconomic policies, such as an economic stimulus program, these near-rational alternatives might represent the more relevant behavior than the standard consumption model.
Keywords: Consumption; Excess Sensitivity; Near-Rationality; Permanent Fund Dividend
JEL Codes: D12; D14; D91; E21; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Alaska Permanent Fund Dividend (PFD) (G35) | aggregate demand shocks (E00) |
| Alaska Permanent Fund Dividend (PFD) (G35) | consumption (E21) |
| income level (D31) | marginal propensity to consume (MPC) (E21) |
| liquidity constraints (E41) | marginal propensity to consume (MPC) (E21) |
| marginal propensity to consume (MPC) (E21) | consumption smoothing (D15) |