The Precautionary Effect of Government Expenditures on Private Consumption

We estimate the effects of different government consumption categories on private consumption. First, we build a unique panel dataset which links household's private consumption to the government consumption of the region where the household lives, for Italy. Then, we use regional variability of government consumption and measure its effect on individual consumption for different categories of government expenditures. We find two main results. First, household's consumption expenditure increases as consumption's variance increases. Second, using regional variability of government consumption we estimate a negative impact of public health care on household consumption variance. Within our model, the results are interpreted in the light of a precautionary saving motive, with public health care expenditures acting as a form of consumption insurance for households. Finally, in order to compute the implied multiplier effect of government consumption, we use our estimates from micro data to calibrate a general equilibrium model with fully flexible prices and incomplete insurance markets. We quantify how much of the observed reaction of private consumption to public expenditures can be accounted by precautionary saving effects alone.