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Transfers and Development: Easy Come, Easy Go?

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  • Luc Christiaensen
  • Lei Pan

Abstract

Contrary to the popular notion that money that is easily earned, is also easily spent, economic theory holds that income is fungible. Drawing on the concept of mental accounting, this study theoretically explores when such a link between spending behaviour and the effort dispensed in obtaining income is plausible. Empirically, it is found that the marginal propensity to consume from unearned income is about three times larger than that from earned income, based on household panel data from rural China, with the difference more pronounced when unearned income is transitory and smaller than earned income. The policy implications are real.

Suggested Citation

  • Luc Christiaensen & Lei Pan, 2010. "Transfers and Development: Easy Come, Easy Go?," WIDER Working Paper Series 125, World Institute for Development Economic Research (UNU-WIDER).
  • Handle: RePEc:unu:wpaper:wp2010-125
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    File URL: http://www.wider.unu.edu/sites/default/files/wp2010-125-.pdf
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    References listed on IDEAS

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    Cited by:

    1. Christiaensen , Luc & Pan, Lei, 2012. "On the fungibility of spending and earnings -- evidence from rural China and Tanzania," Policy Research Working Paper Series 6298, The World Bank.
    2. Beyene, Berhe Mekonnen, 2012. "The Link between International Remittances and Private Interhousehold Transfers," Memorandum 14/2012, Oslo University, Department of Economics.

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