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

By Andreas Fuster, Greg Kaplan, basit. zafar. The Review of Economic Studies, 2018

128 citations recorded by the source corpus.

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 (1) responses to unanticipated gains are vastly heterogeneous (either zero or substantially positive); (2) responses increase in the size of the gain, driven by the extensive margin of spending adjustments; (3) responses to losses are much larger and more widespread than responses to gains; and (4) even those with large responses to gains do not respond to news about future gains. These four findings suggest that limited access to disposable resources, and frictions in adjusting consumption, are important determinants of consumption behaviour. We also find that (5) 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 (6) people do cut spending in response to news about future losses, suggesting that neither is this a consequence of myopia. A calibrated precautionary savings model with utility costs of changing consumption, and a sufficient fraction of low-wealth households, can account for these features of propensities to consume on both the extensive and intensive margins.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/74ab97ded360aa4e29f5c507a8e2133ac7b5e355

Citations in the corpus

• The Intertemporal Keynesian Cross (2018, unknown): “For example, in their survey, Fuster et al. (2018) find that a few households would cut spending immediately in response to the news of a $500 loss one quarter ahead, indicative of some anticipation effects. Agarwal and Qian (2014) find evidence of a spending response between the announcement of a c”