MPC Heterogeneity and Household Balance Sheets

We use sizable lottery prizes in Norwegian administrative panel data to explore how transitory income shocks are spent and saved over time households’ marginal propensities consume (MPCs) vary with household characteristics shock size. find that spending peaks the year of winning gradually reverts normal within five years. Controlling for all items on balance sheets such as education income, it is amount won, age, liquid assets systematically MPCs. Low-liquidity winners smallest (around US$1,500) estimated spend winning. The corresponding estimate high-liquidity large (US$8, 300–150,000) slightly below one-half. While conventional models will struggle account high MPC levels, we show a two-asset life cycle model realistic earnings profile luxury bequest motive can both consumption responses their systematic covariation observables. (JEL D12, D15, E21, G51, H24)