Who Are the Hand-to-Mouth?
NBER Working Paper No. 26643
Many households hold little wealth, especially liquid wealth. In precautionary savings models, absent preference heterogeneity, these households should display not only higher marginal propensities to consume (MPCs), but also lower average propensities to consume (APCs) and higher future consumption growth. We see from the PSID that such “hand-to-mouth” households actually display higher APCs and no faster spending growth. They also adjust spending to a greater extent through the number of categories consumed. Consistent with a role for preference heterogeneity, the panel data show that it is the propensity to be hand-to-mouth, not current assets, that predicts high APC, low consumption growth, and other spending differences for the hand-to-mouth. To identify the extent of preference heterogeneity, we consider the model of Kaplan and Violante (2014) with both liquid and illiquid assets, but allow heterogeneity in preferences. To match the data, the vast majority of poor hand-to-mouth must be impatient and have a high intertemporal elasticity of substitution (IES). The richer, but illiquid, hand-to-mouth are disproportionately high IES, though not impatient. Thus a high IES is a key determinant of assets for households typically viewed as hand-to-mouth. The model additionally shows that preferences play a prominent role in differences in MPCs across consumers.
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Document Object Identifier (DOI): 10.3386/w26643