The Marginal Propensity to Consume in a Depressed Economy: Evidence from a Lottery and Administrative Data
We use the quasi-experimental setting of a tax lottery together with administrative and survey data to provide both revealed-preference estimates of the marginal propensity to consumer (MPC) as well as reported-preference estimates for the same sample of households. Within a depressed economic environment, where there are scarce opportunities for consumer credit, we uncover significantly high MPCs, ranging from 48% to 59%. The estimates from the two methodologies are similar, lending credence to the data. There is significant heterogeneity in MPC, and we link it to observable household characteristics. Households report a much higher MPC for unexpected income losses than for gains. This asymmetry is reflected in their reported saving behavior with households limiting their reduction of debt repayment after unexpected losses.