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How Households Adjust Expenditures And Savings In Response To Income Shock

Kim, Gui Jeong
http://rave.ohiolink.edu/etdc/view?acc_num=osu1500050195880509

Abstract Details

2017, Doctor of Philosophy, Ohio State University, Consumer Sciences.
In this dissertation, I focus on how households adjust their expenses in response to changes in income as well as the asymmetric responses in expenses behavior by distinguishing between income increases and decreases. To account for the prospect theory hypothesis, which emphasizes that utility of consumption depends not only on current consumption but also reference status in terms of how current consumption deviates from past consumption, I use a variable introduced in the 2010 Survey of Consumer Finances (SCF), current expenses relative to usual expenses, as a dependent variable. In the current study, a reference status is measured by subjective assessment of normal income and normal expenses level, rather than by an objective measurement such as lagged income and lagged consumption. I estimate asymmetric income effects on expenses across income quartiles based on a binary variable of income shocks and a continuous variable of income shocks, respectively. To do so, I employ pooled data from the 2010 and 2013 SCF and run Multinomial logit regression, which allows for estimates of the effects of changes in income on each category of a dependent variable, compared to the reference category for the dependent variable. The results with a binary variable of income shocks show that the negative income shock decreases expenses (statistically significant) across all income group, while the positive income shock has a statistically significant effect on increased expenses compared to usual expenses only in the lowest- and highest-income groups. Based on F-tests, I find the asymmetric effect of changes in income on changes in expenses. However, this asymmetry (i.e. the decrease in expenses in response to negative income shocks is greater than the increases in expenses in response to positive income shock) is not consistent with loss-aversion behavior. But it also does not make sense to interpret it as a of the result of liquidity constraints, especially for the highest income group. The results with a continuous variable of income shocks show that the negative income shocks have a statistically significant effect on decreasing expenses, compared to usual expenses across income groups. Yet the positive income shocks have a statistically significant effect on increased expenses, compared to usual expenses, only in the highest-income group. Based on F-tests, the magnitude of the effect of negative income shocks for predicting less versus usual expenses is statistically significantly different from magnitude of the effect of positive income shocks for predicting more versus usual expenses only for the highest income group. That is, there is evidence of loss-aversion behavior only for households in the highest income quartile. The results suggest people may pay more attention to negative shocks and adjust their consumption level given their limited resources, compared to people who experience positive income shocks. Another plausible interpretation is that people in the highest income group are not seriously affected by reduced income and have ability to keep consumption level, while they can easily increase expenses in response to positive income. All in all, the loss aversion assumption seems to be more relevant to high income households. The findings provide implications for financial planners, households, and future researches.
Andrew Hanks (Advisor)
Sherman Hanna (Committee Member)
Robert Scharff (Committee Member)
125 p.
Economics; Home Economics
Income Shock; prospect theory hypothesis; home economics

Recommended Citations

Citations

  • Kim, G. J. (2017). How Households Adjust Expenditures And Savings In Response To Income Shock [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1500050195880509

    APA Style (7th edition)

  • Kim, Gui Jeong. How Households Adjust Expenditures And Savings In Response To Income Shock. 2017. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1500050195880509.

    MLA Style (8th edition)

  • Kim, Gui Jeong. "How Households Adjust Expenditures And Savings In Response To Income Shock." Doctoral dissertation, Ohio State University, 2017. http://rave.ohiolink.edu/etdc/view?acc_num=osu1500050195880509

    Chicago Manual of Style (17th edition)

osu1500050195880509
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