We use sizable lottery prizes in Norwegian administrative panel data to explore how transitory income shocks are spent and saved over time and how households' marginal propensities to
consume (MPCs) vary with household characteristics and shock size. We find that spending peaks in the year of winning and gradually reverts to normal within five years. Controlling for all items on
households' balance sheets and characteristics such as education and income, it is the amount won, age, and liquid assets that vary systematically with MPCs. Low-liquidity winners of the smallest
prizes (around US$1,500) are estimated to spend all within the year of winning. The corresponding estimate for high-liquidity winners of large prizes (US$8,300–150,000) is slightly below one-half.
While conventional models will struggle to account for such high MPC levels, we show that a two-asset life cycle model with a realistic earnings profile and a luxury bequest motive can account for
both the time profile of consumption responses and their systematic covariation with observables.
Fagereng, Andreas, Martin B. Holm, and Gisle J. Natvik.
"MPC Heterogeneity and Household Balance Sheets."
American Economic Journal: Macroeconomics,
Consumer Economics: Empirical Analysis
Intertemporal Household Choice; Life Cycle Models and Saving
Macroeconomics: Consumption; Saving; Wealth
Household Finance: Household Saving, Borrowing, Debt, and Wealth
Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes