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Does Consumption Respond to Predicted Increases in Cash-on-hand Availability? Evidence from the Italian “Severance Pay”

Author

Listed:
  • Margherita Borella

    (University of Turin and CeRP, Collegio Carlo Alberto, Turin)

  • Elsa Fornero

    (University of Turin and CeRP, Collegio Carlo Alberto, Turin)

  • Maria Cristina Rossi

    (Università di Roma, Tor Vergata and CeRP, Collegio Carlo Alberto, Turin)

Abstract

This paper aims at detecting whether Italian households exhibit excess sensitivity in their consumption with regard to “severance pay”, a sizable, expected lump sum that workers receive at either retirement or whenever they leave their job for whatever reason. One of the implications of the life-cycle hypothesis is that consumption does not react when expected income changes are realized, as these are already incorporated by consumers into their (intertemporal) budget constraint. Should consumers exhibit a reaction to anticipated income changes this would be in contrast to one of the main implications of the life cycle hypothesis. Our analysis exploits a rotating panel data set of Italian households, the Survey of Household Income and Wealth (SHIW), for the years starting from 1989 to 2004. By using an Euler equation approach on different categories of consumption we estimate whether close to retirement households exhibit excess sensitivity of consumption with respect to severance pay.Our findings suggest that households do not alter their non-durable goods consumption while they increase their durable consumption in the year when they cash their severance pay.

Suggested Citation

  • Margherita Borella & Elsa Fornero & Maria Cristina Rossi, 2007. "Does Consumption Respond to Predicted Increases in Cash-on-hand Availability? Evidence from the Italian “Severance Pay”," CeRP Working Papers 62, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    • Handle: RePEc:crp:wpaper:62
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    2. Zizza, Roberta & Adamopoulou, Effrosyni, 2017. "Regular versus lump-sum payments in union contracts and household consumption," Working Paper Series 2013, European Central Bank.
    3. Effrosyni Adamopoulou & Roberta Zizza, 2015. "Accessorizing. The effect of union contract renewals on consumption," Temi di discussione (Economic working papers) 1024, Bank of Italy, Economic Research and International Relations Area.
    4. Stefania Basiglio & Maria Cristina Rossi & Arthur van Soest, 2023. "Subjective Inheritance Expectations and Economic Outcomes," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 69(4), pages 1088-1113, December.
    5. Amparo Nagore García & Mariacristina Rossi & Arthur Soest, 2021. "Retirement of the self-employed in the Netherlands," Small Business Economics, Springer, vol. 56(1), pages 385-402, January.
    6. Amparo Nagore Garcia & Mariacristina Rossi & Arthur van Soest, 2018. "Labour Market Decisions of the Self-Employed in the Netherlands at the Statutory Retirement Age," Working papers 057, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    7. Basiglio, Stefania, 2018. "Essays on financial behaviour of households and firms," Other publications TiSEM c13423c5-8bf2-44a7-baa7-3, Tilburg University, School of Economics and Management.

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