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Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation


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  • René Garcia
  • Annamaria Lusardi
  • Serena Ng


Most empirical studies on liquidity constraints classify a consumer as being constrained on the basis of a single indicator such as the asset to income ratio. In this analysis, we model the probability that a consumer faces liquidity constraints as a function of multiple social and economic factors. This probability function is estimated simultaneously with the degree of excess sensitivity of consumption to income in a switching regressions framework. The switching regressions apply optimal weights to the densities for the Euler equations on the two states and are less susceptible to sample misclassification. We are also able to use exclusion restrictions on the Euler equations for the constrained and the unconstrained individuals to discriminate between excess sensitivity due to liquidity constraints, from that due to myopic behaviour and a certain type of time non-separable preferences. Our results based on data from the CEX confirm that liquidity constrained consumers are excessively sensitive to variables already known to economic agents. However, there is evidence that the unconstrained consumers also exhibit behaviour that is consistent with the theoretical predictions. Further analysis suggests that such behaviour could be explained by time non-separable preferences. La plupart des études empiriques sur les contraintes de liquidité déterminent si un consommateur est contraint en fonction d'un indicateur unique comme le ratio des actifs sur le revenu. Dans la présente analyse, nous modélisons la probabilité qu'un consommateur subisse des contraintes de liquidité comme une fonction de plusieurs facteurs économiques et sociaux. Cette fonction de probabilité est estimée simultanément avec le degré de sensibilité excessive de la consommation au revenu dans un cadre de régressions à changement de régime. Les régressions à changement de régime appliquent des poids optimaux aux densités des équations d'Euler dans les deux états et sont moins susceptibles d'erreurs de classification entre les deux échantillons. Nous sommes également en mesure d'utiliser des restrictions d'exclusion dans les équations d'Euler pour les ménages contraints et non contraints afin d'établir si la sensibilité excessive provient de contraintes de liquidité ou d'un comportement myope ou encore d'un certain type de préférences non séparables dans le temps. Nos résultats, fondés sur les données de l'enquête américaine CEX, confirment que les consommateurs subissant des contraintes de liquidité réagissent excessivement à des variables dans leur ensemble d'information. Toutefois, on constate également que les consommateurs non contraints affichent aussi un comportement qui ne correspond pas aux attentes théoriques. Une analyse plus fine suggère qu'un tel comportement pourrait s'expliquer par des préférences non séparables dans le temps.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 95s-09.

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Date of creation: 01 Feb 1995
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Handle: RePEc:cir:cirwor:95s-09

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Keywords: Consumption; Liquidity constraints; Switching regressions; Asymmetries; Consommation ; Conrraintes de liquidité ; Régressions à changement de régime ; Asymétries;

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  1. Andrew B. Abel, . "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers 01-90, Wharton School Rodney L. White Center for Financial Research.
  2. Attanasio, Orazio P & Browning, Martin, 1995. "Consumption over the Life Cycle and over the Business Cycle," American Economic Review, American Economic Association, vol. 85(5), pages 1118-37, December.
  3. David Bowman, Debby Minehart, and Matthew Rabin., 1993. "Loss Aversion in a Savings Model," Economics Working Papers 93-212, University of California at Berkeley.
  4. Altonji, Joseph G & Siow, Aloysius, 1987. "Testing the Response of Consumption to Income Changes with (Noisy) Panel Data," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 293-328, May.
  5. Orazio P. Attanasio, 1994. "The Intertemporal Allocation of Consumption: Theory and Evidence," NBER Working Papers 4811, National Bureau of Economic Research, Inc.
  6. Eberly, Janice C, 1994. "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 403-36, June.
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