Working Paper: NBER ID: w27944
Authors: Orazio Attanasio; Agnes Kovacs; Patrick Moran
Abstract: This paper presents a model of consumption behavior that explains the presence of ‘wealthy hand-to-mouth’ consumers using a mechanism that differs from those analyzed previously. We show that a two-asset model with temptation preferences generates a demand for commitment and thus illiquidity, leading to hand-to-mouth behavior even when liquid assets deliver higher returns than illiquid assets. This preference for illiquidity has important implications for consumption behaviour and for fiscal stimulus policies. Our model matches the recent empirical evidence that MPCs remain high even for large income shocks, suggesting a larger response to targeted fiscal stimulus than previously believed.
Keywords: Temptation Preferences; Hand-to-Mouth Consumers; Marginal Propensity to Consume; Fiscal Stimulus
JEL Codes: D11; D14; D91; E21; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| temptation preferences (D11) | demand for commitment devices (E41) |
| demand for commitment devices (E41) | accumulation of wealth in illiquid assets (G19) |
| accumulation of wealth in illiquid assets (G19) | preference for illiquidity despite availability of high-return liquid assets (E41) |
| preference for illiquidity (E41) | increase in marginal propensity to consume (MPC) from temporary income shocks (E21) |
| income shocks (J65) | consumption behavior (D10) |
| shock size (F35) | consumption response (D12) |
| targeted fiscal stimulus payments (E62) | effectiveness of fiscal stimulus targeting (E62) |