Research
Published Papers
Temptation and Commitment: A Model of Hand-to-Mouth Behvaior
with Orazio Attanasio and Patrick Moran, forthcoming in the Journal of European Economic Association
This paper presents a model of consumption behavior that explains the presence of `wealthy hand-to-mouth' consumers using a mechanism that differs from those analyzed previously. We show that a two-asset model with temptation preferences generates a demand for commitment and thus illiquidity, leading to hand-to-mouth behavior even when liquid assets deliver higher returns than illiquid assets. This preference for illiquidity has important implications for consumption behavior and for fiscal stimulus policies. Our model matches recent empirical evidence that MPC's remain high even for large income shocks, suggesting a larger response to targeted fiscal stimulus than previously believed.
Permanent versus Transitory Shocks over the Business Cycle
with Concetta Rondinelli and Serena Trucchi European Economic Review, Vol.139, 2021
This paper investigates how income shocks shape consumption dynamics over the business cycle. First, we break new ground and create a unique panel dataset of transitory and permanent income shocks by combining household-level income expectations with realizations from the DNB Household Survey for the Netherlands in 2006-2018. We then use the first and second moments of the identified income shocks in a structural life-cycle framework and show that the model matches the observed consumption patterns well. Finally, using counterfactual model simulations we assess the importance of the nature of income shocks (permanent income hypothesis); future income uncertainties (precautionary saving motive); and cohort effects, one-by-one, in shaping consumption dynamics over the observed time period in the Netherlands.
Estimating Temptation and Commitment Over the Life-Cycle
with Hamish Low and Patrick Moran International Economic Review, Vol.62 (1), 2021
This paper estimates the importance of temptation (Gul and Pesendorfer, 2001), for consumption smoothing and asset accumulation in a structural life-cycle model. We use two complementary estimation strategies: first, we estimate the Euler equation of this model; and second we match liquid and illiquid wealth accumulation using the Method of Simulated Moments. We find that the utility cost of temptation is one-quarter of the utility benefit of consumption. Further we show that allowing for temptation is crucial for correctly estimating the elasticity of intertemporal substitution: estimates of the EIS are substantially higher than without temptation. Finally, our Method of Simulated Moments estimation is only able to match well the life-cycle accumulation profiles for both liquid and illiquid wealth if temptation is part of the preference specification. Our findings on the importance of temptation are robust to the different estimation strategies.
Euler Equations, Subjective Expectations and Income Shocks
with Orazio Attanasio and Krisztina Molnar Economica, Vol.87 (346), 2020
In this paper, we make three substantive contributions: first, we use elicited subjective income expectations to identify the levels of permanent and transitory income shocks in a life-cycle framework; second, we use these shocks to assess whether households' consumption is insulated from them; third, we us the shock data to estimate an Euler equation for consumption. We find that households are able to smooth transitory shocks, but adjust their consumption in response to permanent shocks, albeit not fully. The estimates of the Euler equation parameters with and without expectational errors are similar, which is consistent with rational expectations. We break new ground by combining data on subjective expectations about future income from the Michigan Survey with micro data on actual income from the Consumer Expenditure Survey.
Working Papers
Home Ownership and Wealth Accumulation: Evidence from the Netherlands
with Patrick Moran
Consumption Response to Aggregate Shocks and the Role of Leverage
with May Rostom and Philip Bunn, Rej&R Journal of Economic Dynamics and Control
with Patrick Moran , previous version in CEPR Discussion Paper, DP16634
Temptation and Incentives to Accumulate Wealth
with Orazio Attanasio and Patrick Moran
The Heterogeneous Effect of Financial Innovation on Household Spending
with Patrick Moran