Asymmetric Consumption Effects of Transitory Income Shocks*

Abstract

We use the responses of a representative sample of Dutch households to survey questions that ask how much their consumption would change in response to unexpected, transitory income shocks (positive or negative). The questionnaire also distinguishes between relatively small income changes (a one-month increase or drop in income), and relatively larger ones (equal to three-months' income). The results are broadly in line with models of intertemporal choice with precautionary saving, borrowing constraints and finite horizons.

What Would You Do With $500? Spending Responses to Gains, Losses, News, and Loans

“…The MPC distribution for the LOSS treatment (green histogram) is strongly suggestive of bi-modality-nearly 20% of respondents say that they would fully absorb the loss of $500 by reducing current spending. This sign asymmetry has Figure 4: Spending response to losses also been documented by a relatively recent set of papers (Zafar et al, 2013;Sahm et al, 2015;Bracha and Cooper, 2014;Bunn et al, 2017;Christelis et al, 2017).…”

“…Our average MPC is towards the lower end of the estimates found in the literature, for both hypothetical and actual gains of around this size. However, existing studies, like us, have found that majority of households respond little or not at all in response to an income windfall, but that a small sub-group of households (in our case, around one-fifth) spend a substantial fraction of the income windfall (see, for example, Bunn et al, 2017, andChristelis et al, 2017).…”

“…Similarly, Graziani et al (2016) use a quantitative instrument to elicit consumption responses to the 2011 payroll tax cuts: "Please indicate what share of the extra income [from the payroll tax cut] you are using or plan to use to save or invest, spend or donate, and pay down debts." Christelis et al (2017) use the following question to measure quantitative responses to hypothetical gains in an online survey of Dutch households: "Imagine you unexpectedly receive a one-time bonus from the government equal to the amount of net income your household earns in (one-month / three months). In the next 12 months, how would you use this unexpected income transfer?…”

“…A large part of the reported preference literature elicits qualitative spending responses using survey questions that follow Shapiro and Slemrod (2003). More recently, there has been a growing body of work, including ours, that elicit quantitative spending responses (Jappelli and Pistaferri, 2014;Graziani et al, 2016;Christelis et al, 2017). Using strategically-designed survey questions in conjunction with structural models has also been fruitfully applied to other questions related to household financial decisions (Ameriks et al, 2015(Ameriks et al, , 2016.…”

“…More specifically, while previous studies have considered the size and sign effect, we are not aware of any study that has investigated response to news (about gains or losses) or loans. The closest paper to ours, fielded contemporaneously, is Christelis et al (2017) who also use hypothetical scenarios (in a Dutch household survey) to study sign and size asymmetry. Our findings on these points are qualitatively similar (which is reassuring, given differences in the survey population, the design of the questions, and the size of the income shocks).…”