Income variation and excess sensitivity of goods-intensive leisure

Abstract

We investigate the life-cycle permanent income hypothesis (LCPIH) by estimating the effect of exogenous and predictable income variation on students’ signout activity. Students at the United States Air Force Academy (USAFA) receive monthly stipends that cannot be influenced by their labor supply but have considerable and predictable monthly variation. We also observe their absences from campus, which students are required to document on detailed signout logs, and we believe reflect specifically goods-intensive leisure such as dining and entertainment. We estimate the effect of pay variation on leisure choices using difference-in-differences. A $100 increase in monthly income induces 1.8 additional hours off base and increases the frequency of longer-duration trips. Students also record 27 percent more time away from campus than average in weeks when they receive their monthly stipend. These results suggest a departure from the LCPIH using a novel outcome and in a setting where liquidity constraints and imperfect information do not appear to explain the patterns.