Mark Aguiar (Princeton)

Title: Who are the hand-to-mouth?

Abstract: Many households hold little wealth. In standard precautionary savings models these households should not only display higher marginal propensities to consume (MPCs), but also higher future consumption growth. In fact, we see from the PSID that such “hand-to-mouth” households do not display higher growth in spending. These households do display much higher average propensities to consume (APCs) than anticipated by the standard savings model. They also exhibit greater volatility of spending and adjust their 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 low consumption growth, high APC, 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, many poor hand-to-mouth must be relatively impatient and have a fairly high inter-temporal elasticity of substitution (IES). The model shows that preferences play a dominant role in differences in MPCs across consumers and, in particular, mostly explain the higher MPCs for low-asset households.

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