Income Shocks Research Articles

Household Consumption and Dispersed Information

By introducing an information friction to a heterogeneous agent model, we are able to explain two patterns of small economies experiencing large income changes: (1) excess volatility in consumption and (2) household consumption elasticities that have low correlation with income. With a standard dispersed information structure, households cannot distinguish aggregate income shocks from idiosyncratic ones. Their consumption responds excessively to aggregate shocks, which they incorrectly forecast to be too persistent. This effect occurs homogeneously across the income distribution, lowering the correlation of the consumption elasticity with income. We corroborate our central mechanism using survey data on household expectations of their future earnings.

Income Shocks, Financial Hardship, and Changes in Depression Symptomatology Among Older Americans During the First Year of the COVID-19 Pandemic

Using data from the 2018 and 2020 waves of the Health and Retirement Study, this research examined the effect of financial hardship experienced during the COVID-19 pandemic on the mental health of older Americans. Estimates from the ordinary least squares and logistic regressions showed that individuals who experienced income shocks, particularly those with decreased retirement savings/assets income, reported more depressive symptoms and a higher likelihood of depression. Similarly, financial hardship measured as the number of financial arrears was found to be positively correlated with depression symptoms and the onset of depression. Depression symptomatology and onsets were mainly influenced by pandemic-related shocks to retirement/assets income among retired individuals and by earnings shocks among nonretired respondents. The effects were more pronounced among retired individuals and those without a preexisting history of psychiatric problems.

Community membership and reciprocity in lending: Evidence from informal markets

We study credit access in informal economies where market institutions, such as financial reporting systems, auditing, and courts, are nonexistent or function poorly. Using the setting of a large bazaar in India, we find that community membership plays a vital role in access to credit. Wholesalers are more likely to provide credit and offer greater amounts of credit to within-community retailers, and are more lenient when these retailers are delinquent. Furthermore, wholesalers who lent preferentially to their community retailers pre-COVID are more likely to receive help from their community following the COVID-19–related income shock, particularly from same-community landlords and suppliers. Also, wholesalers with low endowments, those with greater within-community information flow about them, and those facing income shocks are more likely to provide preferential credit to their community retailers. Our findings are consistent with an indirect reciprocity mechanism explaining within-community credit flows.

Response of consumers to wage shocks in the framework of the Portuguese assistance program

AbstractThis paper studies the impact on consumption of the exogenous changes in public wages in Portugal during and after the economic and financial assistance program (2011-2014), by exploiting the variability in the size of such changes across municipalities. The initial wage cuts triggered a marked reduction of private consumption, while the reinstatements in the later years gave rise to an increase, albeit of a smaller magnitude. The consumption response was larger for employees with relatively lower wages. Households smoothed the impact on consumption of negative income shocks partly by drawing down their deposits. Consumer credit did not play such a role, as households deleveraged as a response to those negative shocks.

Financial intermediation and efficient risk sharing in two-period lived OLG models

This article investigates a two-period lived overlapping-generations (OLG) model that incorporates financial intermediation. A risk-neutral bank offers loan and deposit contracts that insure risk-averse agents against idiosyncratic income shocks. Agents prefer financial intermediation to capital markets if it provides efficient risk sharing. The analysis demonstrates that in any two-period lived OLG model in which productive capital is increasing in investment levels, financial intermediation, when implemented for the purpose of efficient risk sharing, cannot instigate business cycles or complex dynamics. The resulting dynamics is monotonic and qualitatively indistinguishable from the dynamics of the classical OLG model by Diamond (Am Econ Rev 55(5):1126–1150, 1965). Business cycles may only occur if banks offer inefficient contracts. Efficient contracts will, in general, not induce dynamically efficient growth paths.

The effect of actual and expected income shocks on mental wellbeing: Evidence from three East Asian countries during COVID-19

This paper evaluates the effects of economic shocks to current and expected income reduction on mental wellbeing. We use individual-level data from three East Asian countries; China, Japan, and South Korea, during the early phases of the pandemic when the COVID-induced economic shocks were severe. The findings reveal significant causal effects from current and expected income reduction on different aspects of mental health deterioration, including anxiety, trouble sleeping, boredom, and loneliness. Interestingly, we found that expectations of future income loss have a significantly larger effect on people's mental wellbeing compared to current falls in income. This has significant implications for the design of policies to support income during pandemics.

Mother Africa: The long run effects of income shocks on fertility

We revisit the effect of long run income growth on population fertility in some of the poorest countries in the world. Causal inference is enabled through proxying income windfalls by oil price shocks in oil rich versus oil poor provinces. We find that long run income growth, following oil windfalls, significantly and robustly reduces fertility in oil producing provinces. To explain these results, we document that oil windfalls have translated to higher incomes in oil-producing provinces promoting parents to invest in the human capital of their children, in terms of acquiring more schooling and delaying girls’ age of marriage. Investing in women's education has persisted over the long-run causing a further delay in the age of first marriage and the giving of first birth.

The seasonality of conflict

This paper uses one of the largest changes to labor demand in developing countries—harvest—to examine how the returns to fighting vs. working impact the intensity of conflict. Exploiting the exogenous allocation and timing of harvest across Afghanistan, Iraq, and Pakistan, we find that the onset of harvest reduces the number of insurgent attacks by between 6 and 21%. This is not due to changes in local temperature or rainfall, to name a few possibilities. Moreover, because harvest is transitory and anticipated, our estimates minimize the potential bias present in other persistent income shocks commonly used in the literature.

Digital Payments and Consumption: Evidence from the 2016 Demonetization in India

Abstract We study how consumer spending responds to digital payments, using the differential switch to digital payments across consumers induced by the sudden 2016 Indian Demonetization for identification. Digital payment use rose by 2.94 percentage points and monthly spending increased by 2.38% for an additional 10 percentage points in prior cash dependence. Spending remained elevated even when cash availability recovered. Robustness analyses show that the spending response is not driven by purchase substitution, income shocks, credit supply, or price changes. We provide causal evidence that digital payments increase consumer spending due to subdued endowment effects.

Measuring household vulnerability to medical expenditure shock: method and its empirical application.

To investigate household vulnerability for inability to cope with medical expenditure shock, we propose a method of measuring household vulnerability to medical expenditure shock by allowing for the heteroscedasticity and dependence of medical expenditure shock and income shock. Using the data from China Health and Nutrition Survey, we estimate the vulnerability of Chinese households, and further investigate crucial characteristics associated with it by comparing the vulnerability levels among groups with different characteristics and an empirical regression with Shorrocks-Shapely decomposition of R squared. Our research shows that health status contributes most to the household vulnerability, and good health helps to reduce the household's vulnerability. Households with stable income and high-education have greater ability to cope with uncertain medical expenditure, and are less vulnerable. Medical insurance plays a limited role in reducing household vulnerability, and the specific type of medical insurance has little influence. All of these findings are conducive to identifying vulnerable households and designing policies to reduce the vulnerability of households.

Types, determinants, and outcomes of entrepreneurial behaviours during crises

ABSTRACT Entrepreneurs usually have several means at their disposal to deal with and overcome adverse circumstances, ranging from simple non-resourceful coping strategies to more elaborate resourceful behaviours. However, entrepreneurs who find themselves in conditions of prolonged adversity and disadvantage have few effective possibilities to withstand sudden adversity such as crises and income shocks. Based on these premises, we develop theory on the types, antecedents, and outcomes of entrepreneurial responses to adversity by investigating how entrepreneurs living in conditions of extreme poverty may behave resourcefully while facing two major crises in a short timeframe. Through an analysis of entrepreneurship in South-West Cameroon, we identify three behaviours entrepreneurs enact in response to crises: passive, hustling, and future-oriented, which differ with regards to activities, driving motivations, main objectives, approaches towards present and future adversity, and dominant focus concerning the use of resources. We also find that entrepreneurs’ enacted behaviours depend chiefly on the nature of the losses they incur and on the type of social capital they can avail of in the aftermath of a crisis. Lastly, we suggest that the different behaviours result in further changes in the entrepreneurs’ resource levels, which subsequently influence the likelihood that entrepreneurs will shift between behaviours.

Temptation and Commitment: a Model of Hand-to-Mouth Behavior

Abstract 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 the recent empirical evidence that Marginal Propensity to Consume remain high even for large income shocks, suggesting a larger response to targeted fiscal stimulus than previously believed.

Consumption and Liquidity Shocks

AbstractWe study the response of consumption to anticipated and unanticipated liquidity gains using information on gifts (occasional and recurrent) and severance pay from the Italian Household Income and Wealth survey. Consistent with standard intertemporal consumption models, we find that unanticipated income shocks affect nondurable consumption while anticipated shocks have no effect. In the former case, the marginal propensity to consume is estimated to be around 7%. We find also that this consumption response is stronger for poor households (around 10%) and negligible for rich ones.

Consumption Smoothing in the Working-Class Households of Interwar Japan

I analyze factory worker households in the early 1920s in Osaka to examine idiosyncratic income shocks and consumption. Using the household-level monthly panel dataset, I find that while households could not fully cope with idiosyncratic income shocks at that time, they mitigated fluctuations in indispensable consumption during economic hardship. In terms of risk-coping mechanisms, I find suggestive evidence that savings institutions helped mitigate vulnerabilities and that both using borrowing institutions and adjusting labor supply served as risk-coping strategies among households with less savings.

COVID and the crisis: the economic impact of the COVID-19 pandemic on the well-being of elite athletes and their thoughts about career ending

ABSTRACT Research question This study investigates the economic impact of the COVID-19 pandemic in 2020 on the subjective well-being of elite athletes in Germany and their thoughts about ending their careers. Research methods Using survey data from athletes who are supported by the German Sports Aid Foundation (n = 1652), the study first calculates the negative income shock experienced by elite athletes during the COVID-19 pandemic and then estimates the effects on the athletes’ subjective well-being, in the form of life satisfaction. Additionally, the study estimates the potential influence of an income shock on career ending thoughts. Results and Findings Regression results reveal that athletes, who experienced a negative income shock in 2020 reported on average lower life satisfaction overall. Life satisfaction was lower, the larger the shock and the lower the income of the athlete. Furthermore, athletes, who had a negative income shock in 2020, were more likely to ponder ending their careers in 2020. Implications The paper stresses the need for better financial funding for athletes. It also adds to the literature on career endings of athletes by suggesting that financial hardship could be a determinant for athletes to end their careers. The potential subsequent increase in dropout rates not only represents inefficiency but also signifies a loss of talent.

Inequality in Russia over time and over the life cycle

AbstractUsing Russian longitudinal data for 1994–2018, we document a secular decline in consumption and income inequality. Although within‐cohort inequality is also declining, the life‐cycle inequality profiles of income and consumption are surprisingly flat. A calibrated life‐cycle model with incomplete markets, high initial variance of the persistent income component, and moderately persistent income shocks is consistent with nearly flat life‐cycle inequality profiles and the puzzlingly large insurance role of assets found in the Russian data. This is in contrast to the standard calibrations that fail to match the life‐cycle inequality profiles and the panel‐data evidence on consumption insurance.

Consumption response to a natural disaster: Evidence of price and income shocks from Chennai flood

We utilize monthly individual-level financial data and item-level supermarket sales data to study how consumption responds to one of the costliest natural disasters in India. We find that consumption dropped by 11% during the disaster, 65% of which was recovered after the disaster. On average, consumption per capita dropped by $312 per year, which costs about 5% of the GDP. We also show that natural disasters depressed consumption through income shocks instead of price shocks. Consumers smooth consumption using credit card, banks loans and wealth in coping with the shocks.

Spending Response to a Predictable Increase in Mortgage Repayments: Evidence from Expiring Interest-Only Loans

Abstract We study how homeowners' consumption responds to a negative and anticipated disposable income shock: the beginning of the amortization period on interest-only mortgages. We identify spending behavior through an event study approach, by matching loan-level data that covers the universe of Danish mortgages to detailed administrative registries on borrowers. In response to an average increase in installments worth 9% of income, consumption drops by 3% of income, when amortization begins. The reduction in expenditure is persistent. Borrowers who fail to smooth consumption are highly leveraged and likely to be denied a new interest-only loan, upon expiration.

Reducing energy poverty by nearly universal pension coverage of rural China

This paper estimates the causal effect of income change on reducing energy poverty by exploiting age-based eligibility for China’s New Rural Pension Scheme (NRPS) through a regression discontinuity (RD) design. More than one billion people worldwide live in energy poverty, and the situation is even more difficult in developing world. It is an important development challenge to reduce energy poverty, which could be further associated with health outcome, labor productivity, and educational achievements. While public policies that increase income for poor households are the most direct ways to reduce energy poverty, the reverse causality makes establishing a convincing causal link between income and energy poverty challenging. Using the quasi-experimental variation in income induced by NRPS, this paper addresses the endogeneity of income and examines the impact of exogenous sharp changes in income on energy consumption behaviors. The findings indicate substantial increases in modern energy consumption and sizable reductions in solid fuels (e.g., straw and fuelwood), suggesting that “windfall income” by pension coverage alleviates energy poverty. Although individuals could anticipate the income shocks by pension coverage, the evidence suggests that they do not engage in anticipatory responses to smooth their consumption. Further evidence shows that liquidity constraints may be the underlying mechanism for the lack of anticipatory responses in household energy consumption. Besides reducing energy poverty, the results demonstrate that pension coverage leads to a decrease in elderly labor supply, an increase in subjective health and life satisfaction, and an increase in non-energy consumption, all of which are positively associated with the well-beings of senior citizens. We anticipate that the findings of this paper in the context of China may be extended to developing world which has been expected to set up targeted measures to tackle energy poverty in upcoming decades.

Income Shocks and Electoral Accountability: Evidence from Natural Resource Windfalls

Income Shocks and Electoral Accountability: Evidence from Natural Resource Windfalls