Excess Sensitivity of High-Income Consumers
by Lorenz Kueng – Northwestern University and NBER
Abstract
Using new transaction data, I nd that consumption is excessively sensitive to large,
regular, predetermined and salient payments from the Alaska Permanent Fund, with a
large average marginal propensity to consume (MPC) of 25% for nondurables and services.
The MPC is heterogeneous, monotonically increasing in income, and the average is largely
driven by high-income households, who have MPCs above 50%. The micro data and the
properties of the payments rule out most previous explanations of excess sensitivity such as
liquidity constraints and inattention. Using a su cient statistics approach, I show that the
welfare loss from excess sensitivity depends on the MPC and the relative payment size as
a fraction of income. Since these two statistics are negatively correlated, the welfare losses
are similar across households and small (less than 0.1% of wealth), despite the large MPCs.