Income Shocks Research Articles

Transitory Income Windfalls and Charitable Giving: Evidence from Norwegian Register Data, 1993-2021

Abstract This paper studies the impact of unearned, transitory income shocks on charitable giving using Norwegian administrative data. We exploit the random timing and size of lottery wins and our long time-period (1993-2021) to estimate both short- and longer-term impacts. We find no meaningful effect of small windfalls. Yet, windfalls exceeding $10,000 induce a long-lasting increase in the likelihood to donate, the absolute level of donations, and the share of annual income donated (conditional on donating). We show that this is consistent with individuals thinking of large transitory income shocks as a long-term addition to their annual income.

Job loss, consumption insurance, and household time allocation

This study examines how married households respond to negative income shocks resulting from the husband’s job loss, focusing on both monetary insurance channels and changes in the time use of husbands and wives. Using a unique Japanese panel dataset, the empirical analysis shows that the husband’s involuntary job loss leads to significant and persistent declines in his labor earnings. However, the impact on household consumption expenditure is considerably smaller, with only about one-fifth of the income shock transmitted to consumption, suggesting that a substantial amount of monetary insurance is at work. In the short run, unemployment benefits play a crucial role in mitigating the shock, while the wife’s labor supply becomes important in the long run, especially for households where the wife was not employed full-time before the job loss. Additionally, husbands significantly increase their time spent on home production following job loss, and this effect persists for at least three years.

Microsimulation approaches to studying shocks and social protection in selected developing economies

In this paper, I calculate automatic stabilization in Ghana, South Africa, and Ecuador to explain how they cushion income amid income and demand shocks. Additionally, I stress-test fiscal policies within these countries to gauge welfare alternatives and insurance. Adopting a discretionary action approach for Ghana, I introduce additional safety nets that improve welfare since the existing system fails shock resistance tests. The use of a microsimulation framework is justified as it can isolate the exact redistributive impact of tax-benefit policies and reforms from a changing environment where such policies operate. Income stabilization ranges from 1% to 22%, while demand stabilization ranges from 4% to 25% across the three countries. I formalize a new concept of poverty stabilization that ranges from nil to 46% to measure vulnerability. Through the study’s results, I reveal that the extent of income insurance needs to be improved in lower- and middle-income countries.

COVID‐19 Pandemic and Women's Age at Marriage: New Evidence From India

AbstractA rich literature has documented the relationship between age at marriage and girls’ health and educational outcomes. The upheaval caused by the pandemic on household decision‐making has been hypothesized to have influenced the age of marriage, but the direction of impact is unclear. On the one hand, the pandemic may have increased the age at marriage if lockdown policies and negative income shocks to families placed a burden on household wealth and the ability to pay for weddings. On the other hand, the age of marriage could have decreased during the pandemic due to school closures that kept girls out of school, parental deaths that encouraged families to expedite weddings, and lower wedding costs because of government mandates to have smaller weddings. Using data from the National Family Health Survey of 2019–2021 of India, we explore how the pandemic impacted age at marriage for women using district and household fixed effects models. After accounting for secular trends in the age of marriage and contingent on the model and specification, we find a significant increase in age at marriage for women who got married during the pandemic by 1.1–1.2 years as compared with those married before the pandemic.

Reprint of: How do households respond to income shocks?

We use panel data from the Italian Survey of Household Income and Wealth from 1991 to 2016 to document what components of the household budget constraint change in response to shocks to household labor income, both over shorter and over longer horizons. Consumption and wealth responses are informative about the household consumption (or savings) function and thus about what class of consumption-savings model best describes the data. Empirically, we first show that shocks to labor income are associated with negligible changes in transfers and non-labor income components, modest changes in consumption expenditures, and large changes in wealth. To understand the wealth response we then split households into a sample that does not own business or real estate wealth, and a sample that does. For the first group, we find that consumption responses are more substantial (and increasing with the horizon of the income shock) and wealth responses are much smaller (and mildly increasing with the income shock horizon). Turning to theory, we argue that for this group, a simple extension of the standard permanent income hypothesis (PIH) consumption function that allows for partial insurance against even permanent income shocks explains the consumption and wealth responses well, both at short and long horizons. For the second group with business wealth or real estate wealth the standard framework cannot explain the large changes in wealth associated with income shocks. We conclude that models which include shocks to the value of household wealth are necessary to fully evaluate the sources and consequences of household resource risk.

Associations of serial negative income shock and all-cause mortality: a longitudinal study in China

IntroductionWith a precarious economic outlook and increasing income volatility in current times, understanding the association between negative income shock and health is crucial. However, few studies have examined such associations...

Vulnerability of the informal sector in an emerging economy: a multi-level analysis

ABSTRACT This study investigates the determinants of vulnerability and the vulnerability gap between workers in an emerging economy’s formal and informal employment sectors. To this end, a multi-level model combined with a fixed-effect model was employed to capture idiosyncratic and covariate vulnerabilities. The results from the multi-level model show signs of a ‘cycle of vulnerability’ for informal workers, in that covariate shocks indirectly impact idiosyncratic shocks, which in turn leads them to suffer more from covariate vulnerability. Compared to those with formal employment, informal workers are 1.2% more likely to fall into poverty in the future. Among wage workers, informal wage workers had higher vulnerability indices than formal sector workers, with a vulnerability gap of 3.1%. These gaps are more significant when accounting for time-invariant unobserved heterogeneity. Based on these results, it is vital to consider idiosyncratic and covariate components to reduce vulnerability in the informal sector. Specifically, for informal workers who engage in business and industry sectors at high risk of income shocks, the government should monitor and provide them with legal frameworks that will prevent them from being exposed to a high risk of vulnerability. Additionally, a policy expanding voluntary social insurance should be promoted to support informal groups.

Growing apart: Declining within- and across-locality insurance in rural China

We consider risk sharing in rural China during its rapid economic transformation from the late 1980s through the late 2000s. We document an erosion of consumption insurance against both household-level idiosyncratic and village-level aggregate income shocks, and show that this decline is related to observable economic changes: the shift out of agriculture, the decline of publicly owned Township-and-Village Enterprises, and increased migrant work. Further evidence suggests that as these changes took place at the village level, higher levels of government failed to offset these effects through the tax-and-transfer system, leaving households more exposed to both idiosyncratic and village-aggregate risk.

Alcohol consumption response to pandemic induced income shocks in India

The study assesses the impact of the Covid-19 pandemic on household consumption of alcohol in India, considering both income shocks and supply-side factors. based on a nationally representative household survey conducted by CMIE. Using a 2SLS panel regression model and employing an approach akin to difference-in-differences technique, our study finds that the pandemic induced lockdowns resulted in a sharp increase in the share of alcohol in total expenditure across rural and urban India, and for all income levels. Alcohol consumption varies by education level, by caste, religion, and severity of income shocks. The increased alcohol consumption during the pandemic, and more so among the households that faced a severe income shock, despite the supply restrictions, suggest the stronger impact of stress-response-dampening hypothesis and self-medication hypothesis compared to the income effect. Despite state-imposed supply restrictions, including temporary alcohol shop closures and subsequent reopening with higher taxes, the study raises concerns about a disproportionate rise in alcohol consumption among the most economically impacted. This underscores the need for balanced policy responses, considering both economic stressors and public health imperatives, and emphasizes targeted interventions to mitigate the consequences of increased alcohol consumption during crises.

Retail assortment under demand shocks: Evidence from the US yogurt market

AbstractDespite extensive research on retailers' price responses to demand shocks, much less is known about their non‐price responses. Using heterogeneity in timing, location, and magnitude of income and wealth shocks associated with the 2008 Great Recession, we explore how US retail stores adjusted product offerings under local demand shocks. We find that stores offer fewer products and varieties besides lowering prices. Using a structural demand model, we quantify the net welfare impact of the price and assortment adjustments. On average, the consumer welfare losses from variety reduction more than offset the welfare gains from price reductions.

Consumption dynamics and welfare under non-Gaussian earnings risk

Recent empirical studies document that the distribution of earnings changes displays substantial deviations from lognormality: in particular, earnings changes are negatively skewed with extremely high kurtosis (long and thick tails), and these non-Gaussian features vary substantially both over the life cycle and with the earnings level of individuals. Furthermore, earnings changes display nonlinear (asymmetric) mean reversion. In this paper, we embed a very rich “benchmark earnings process” that captures these non-Gaussian and nonlinear features into a lifecycle consumption-saving model and study its implications for consumption dynamics, consumption insurance, and welfare. We show four main results. First, the benchmark process essentially matches the empirical lifetime earnings inequality—a first-order proxy for consumption inequality—whereas the canonical Gaussian (persistent-plus-transitory) process understates it by a factor of five to ten. Second, the welfare cost of idiosyncratic risk implied by the benchmark process is between two-to-four times higher than the canonical Gaussian one. Third, the standard method in the literature for measuring the pass-through of income shocks to consumption—can significantly overstate the degree of consumption smoothing possible under non-Gaussian shocks. Fourth, the marginal propensity to consume out of transitory income (e.g., from a stimulus check) is higher under non-Gaussian earnings risk.

Assessing the effectiveness of social protection measures in mitigating COVID-19-related income shocks in the European union

By means of counterfactual simulation methods, this paper quantifies the role of tax–benefit policies in mitigating the shock of the COVID-19 pandemic to household income in the European Union. The tax-benefit microsimulation model for the European Union EUROMOD is used to decompose changes in the income distribution into the effects of: (i) earnings losses due to COVID-19, (ii) automatic stabilizers, (iii) monetary compensation schemes introduced during the pandemic; and (iv) COVID-19-specific reforms to taxes and benefits implemented by European Union governments. The results show a great deal of heterogeneity between countries in terms of earnings losses and the effect of tax-benefit policies during the COVID-19 pandemic. In most countries, the largest contribution to cushioning the economic shock of the pandemic comes from monetary compensation schemes. Automatic stabilizers also play a role, mainly through the effects of social insurance contributions, taxes, and unemployment insurance benefits. Tax-benefit systems cushioned incomes to a large extent even among those most severely affected by the shock to earnings, with an important role for monetary compensation schemes, but also a larger stabilizing effect of unemployment insurance. Among automatic stabilizers, social assistance benefits played an important role in cushioning the income shock for the poorest quintiles among the most severely affected, but only in selected countries.

Financial Literacy and Risk Protection During the Covid-19 Pandemic

AbstractThis study documents that competent access to financial markets can smooth consumption in the face of idiosyncratic income shocks. Using household-level data on financial literacy and financial resilience in Italy during the first phase of the Covid-19 pandemic, we find that financial literacy and financial asset ownership both influenced consumption changes in theoretically sensible ways. The results are robust in specifications controlling for several socio-demographic characteristics, saving choices, public transfers, and to different estimation methods.

FinTech development and household resilience to negative income shocks: The role of informal risk sharing

In this study, we investigate the impact of FinTech development on household resilience to negative income shocks from the perspective of informal risk sharing. We find that experiencing negative income shocks weakens household resilience by 33.17% on average, and the enhancement of FinTech development by 1% mitigates the impact of negative income shocks on household resilience by 1.3974% on average. By estimating the marginal effects for households at different well-being quantile groups, we further disclose that the effects of regional FinTech development on household resilience to negative income shocks are more prominent in richer households, showing the potential challenges of the digital divide, although the mitigation effect of FinTech is significant for all groups. The mechanisms underlying the effects of regional FinTech development on household resilience to negative income shocks are increases in the income transfer within risk-sharing networks among households due to the reduction of risk-sharing costs, especially for households with strong ties. The results further confirm the importance of FinTech development and informal risk-sharing to households on household resilience enhancement.

Consumption Responses to Income Shocks through Lottery Winning: Evidence from Older Adults in Singapore

AbstractWe study the effects of lottery winning on consumption spending using household survey data of older individuals aged 50–70 years in Singapore. We find strong consumption responses to a transitory income shock from lottery wins, and lottery winners spend about half of their prizes within 12 months of winning. We show that consumption responses are stronger among households with more binding liquidity constraints. The strong consumption response suggests that fiscal stimulus policies or other public transfer programmes could effectively boost consumption spending in the short run.

Assessing the role of tax‐benefit policies during the COVID‐19 pandemic: Evidence from the Andean region

AbstractThis paper aims to assess the role of tax‐benefit policies in mitigating the effects of COVID‐19 on the distribution of household disposable income in Colombia, Ecuador, and Peru. We exploit data from phone surveys collected during the pandemic combined with tax‐benefit microsimulation techniques to nowcast the distribution of household disposable income. Our results show a sharp drop in household disposable income and a dramatic increase in poverty and inequality during the second quarter of 2020. By the end of 2020, the economy recovers but poverty and inequality remain above the pre‐pandemic levels. COVID‐related policies cushion the effect of the crisis at the bottom of the distribution, and their effect on poverty and inequality largely depends on the generosity of the benefits implemented. By contrast, automatic stabilizers mitigate the impact of the income shock at the top of the distribution due to the effect of social insurance contributions and personal income tax, whereas social assistance programs in place before the pandemic fail to act as automatic stabilizers due to their design as proxy means‐tested benefits. We validate our nowcasting estimates with actual survey data from the end of 2020 and show that our results match closely poverty and inequality indicators in all three countries.

Income Shocks and Their Transmission into Consumption

This paper reviews the economics literature of, primarily, the past 20 years that studies the link between income shocks and consumption fluctuations at the household level. We identify three broad approaches through which researchers estimate the consumption response to income shocks: (1) structural methods in which a fully or partially specified model helps identify the consumption response to income shocks from the data, (2) natural experiments in which the consumption response of one group that receives an income shock is compared with another group that does not, and (3) elicitation surveys in which consumers are asked how they expect to react to various hypothetical events.

Digitalisation and its Impact on Social Protection Programmes Effectiveness: A Case from South Africa

The benefit of digitalisation, including the use of information management systems and electronic databases, in improving the effectiveness of social protection programmes is acknowledged by researchers and practitioners. However, concerns about digital- and financial exclusion stemming from increased reliance on digital technologies have also surfaced in recent studies. This study uses official data from South Africa's General Household Survey and the Global Findex database to explore these concerns. The potential gains of expanding social protection programmes through digitalisation are tested with simulations and distinct levels of income shocks. Additionally, two logistic regressions are employed to analyse relevant demographic variables for digital and financial inclusion. In combination with the quantitative approach, qualitative interviews were conducted with social protection experts from the South African Social Security Agency to gain insights into the impact of the digitalisation of social protection programmes. The results suggest that digitalising identification and delivery mechanisms in social protection improves equality through increased income levels. Digital access is associated with education, income, gender, population group, family size, and participation in the formal or informal sector. Financial access is linked to education level and gender. The study also identified perceived opportunities, including enhanced verification and streamlined application processes, which can improve programme effectiveness. However, integration, coordination, limited digital infrastructure, and digital illiteracy challenges may increase both digital- and financial exclusion.

Efficient risk sharing and separation

This paper extends the model of risk sharing with limited commitment to feature separation. Partners face idiosyncratic income and match quality shocks, share risk subject to limited commitment, and separate whenever they are better off doing so. We characterise analytically the sets of shock realisations where constrained-efficient separations occur and the dynamics of consumption while the risk-sharing partnership continues. The separation probability typically jumps as parameter values change continuously, and an additional inefficient equilibrium emerges. A key reason is complementarity between risk sharing and staying together today and in the future. Income inequality affects consumption inequality via its effect on separations, and consumption inequality can optimally exceed income inequality for any history of income realisations. Both partial risk sharing and separation are relevant for many applications, including the interaction between partners in a household and countries in an economic union.

Heterogeneous Responses to Job Mobility Shocks in a HANK Model with a Frictional Labor Market

We use a heterogeneous agent New Keynesian model with a frictional labor market featuring on-the-job-search to study how job switching affects consumption decisions for individuals with different wealth levels. We find that an increased job switching rate, driven by an exogenous shift in employed individuals' job search efficiency—acting as a positive future income shock—results in a larger decline in current demand for the wealth rich relative to the wealth poor. This larger consumption reduction for the wealth rich is due to the equilibrium decline in their financial wealth.