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Trickle-Down Consumption

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  • Marianne Bertrand
  • Adair Morse

Abstract

Have rising income and consumption at the top of income distribution since the early 1980s induced households in the lower tiers of the distribution to consume a larger share of their income? Using state-year variation in income level and consumption in the top first quintile or decile of the income distribution, we find evidence for such “trickle-down consumption.” The magnitude of effect suggests that middle income households would have saved between 2.6 and 3.2 percent more by the mid-2000s had incomes at the top grown at the same rate as median income. Additional tests argue against permanent income, upwardly-biased expectations of future income, home equity effects and upward price pressures as the sole explanations for this finding. Instead, we show that middle income households’ consumption of more income elastic and more visible goods and services appear particularly responsive to top income levels, consistent with supply-driven demand and status-driven explanations for our primary finding. Non-rich households exposed to higher top income levels self-report more financial duress; moreover, higher top income levels are predictive of more personal bankruptcy filings. Finally, focusing on housing credit legislation, we suggest that the political process may have internalized and facilitated such trickle-down.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18883.

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Date of creation: Mar 2013
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Handle: RePEc:nbr:nberwo:18883

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References

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  1. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
  2. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  3. Luttmer, Erzo F. P., 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp04-029, Harvard University, John F. Kennedy School of Government.
  4. Campbell, John Y. & Cocco, Joao F., 2007. "How do house prices affect consumption? Evidence from micro data," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(3), pages 591-621, April.
  5. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2001. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt44k6g6vx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jiri, 2010. "How large are housing and financial wealth effects? A new approach," Working Paper Series, European Central Bank 1283, European Central Bank.
  7. Janna L. Matlack & Jacob L. Vigdor, 2006. "Do Rising Tides Lift All Prices? Income Inequality and Housing Affordability," NBER Working Papers 12331, National Bureau of Economic Research, Inc.
  8. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 122(2), pages 831-877, 05.
  9. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(4), pages 175-200, Fall.
  10. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(4), pages 1449-1496, November.
  11. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, American Economic Association, vol. 101(5), pages 2132-56, August.
  12. Thomas Piketty & Emmanuel Saez, 2003. "Income Inequality In The United States, 1913-1998," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(1), pages 1-39, February.
  13. F. Thomas Juster & Joseph P. Lupton & James P. Smith & Frank Stafford, 2006. "The Decline in Household Saving and the Wealth Effect," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 20-27, February.
  14. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, July.
  15. Orazio Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2005. "Booms and busts: consumption, house prices and expectations," IFS Working Papers, Institute for Fiscal Studies W05/24, Institute for Fiscal Studies.
  16. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, American Economic Association, vol. 92(3), pages 706-718, June.
  17. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(3), pages 1253-1296, August.
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Cited by:
  1. Moritz Drechsel-Grau & Kai Daniel Schmid, 2013. "Consumption-Savings Decisions under Upward Looking Comparisons: Evidence from Germany, 2002-2011," IMK Working Paper 118-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  2. Airaudo, Marco, 2013. "Monetary policy, stock prices, and consumption externalities," Economics Letters, Elsevier, Elsevier, vol. 120(3), pages 537-541.
  3. Mark Setterfield & Yun Kim, 2013. "Debt Servicing, Aggregate Consumption, and Growth," Working Papers, Trinity College, Department of Economics 1316, Trinity College, Department of Economics.

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