NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Andreas Fuster, Greg Kaplan, Basit Zafar

NBER Working Paper No. 24386
Issued in March 2018
NBER Program(s):Economic Fluctuations and Growth, Labor Studies, Monetary Economics, Public Economics

We use survey questions about spending in hypothetical scenarios to investigate features of propensities to consume that are useful for distinguishing between consumption theories. We find that (i) responses to unanticipated gains are vastly heterogeneous (either zero or substantially positive); (ii) responses to losses are much larger and more widespread than responses to gains; and (iii) even those with large responses to gains do not respond to news about future gains. These three findings suggest that limited access to disposable resources is an important determinant of spending behavior. We also find that (iv) households do not respond to the offer of a one-year interest-free loan, suggesting that this is not a consequence of short-term credit constraints; and (v) people do cut spending in response to news about future losses, suggesting that neither is this a consequence of myopia. A calibrated two-asset life-cycle precautionary savings model can account for these features of propensities to consume, but cannot account for (vi) a positive extensive-margin size-effect for spending responses to gains, which suggests that non-convexities due to durability, salience or attention costs may also be important.

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Document Object Identifier (DOI): 10.3386/w24386

 
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