Latent Heterogeneity in the Marginal Propensity to Consume

Lewis, Daniel J.; Melcangi, Davide; Pilossoph, Laura

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Latent Heterogeneity in the Marginal Propensity to Consume

Abstract: We estimate the unconditional distribution of the marginal propensity to consume (MPC) using clustering regression and the 2008 stimulus payments. Since we do not measure heterogeneity as the variation of MPCs with observables, we can recover the full distribution of MPCs. Households spent at least one quarter of the rebate, and individual households used rebates for different goods. While many observables are individually correlated with our estimated MPCs, these relationships disappear when tested jointly, except for nonsalary income and the average propensity to consume. Household observables explain at most one quarter of MPC variation, highlighting the role of unobserved heterogeneity.

Keywords: marginal propensity to consume; consumption; tax rebate; heterogeneous treatment effects; machine learning; clustering; C-means;

JEL Classification: D12; D91; E21; E32; E62;