The Marginal Propensity to Consume Out of Liquidity: Evidence from Random Assignment of 54,522 Credit Lines∗

This paper studies how consumer spending, debt, and labor supply decisions respond to an exogenous shock to credit availability. I design and implement a randomized trial at a European retail bank where I deliberately vary the credit card limits of 54,522 pre-existing card holders. I obtain four empirical results: (1) credit availability has a large and significant effect on spending and the use of credit; (2) this propensity remains substantial even for those who are far from the limit; (3) increases in spending are concentrated in durables and services; (4) credit line utilization displays mean-reverting dynamics. The findings are qualitatively inconsistent with the predictions of a simple permanent income model, as well as myopic (e.g., rule-of-thumb, impatient) behavior. I then build a partial equilibrium precautionary savings model with illiquid durables, and I use the endogenous ex-post heterogeneity to study the cross-sectional features of the responses with respect to balance sheet position and income shocks. ∗I am extremely grateful to my advisors Doug Bernheim, John Beshears, John Cochrane, Luigi Pistaferri and Cevdet Akçay for their invaluable guidance and support. For helpful comments, I also thank Adrien Auclert, Chris Carroll, Bob Hall, Ayşe İmrohoroğlu, Jonathan Levin, Davide Malacrino, Eren Ocakverdi, Jonathan Parker, Amit Seru, Alp Şimşek and Aiga Štokenberga. This research was partially supported by the NBER Household Finance Grant and the B.F. Haley and E.S. Shaw Fellowship for Economics. I was a paid part-time employee of the firm owning the data utilized for this paper but was not paid for work related to the paper and the paper was not subject to review by the firm prior to release. All errors are my own. †Email: [email protected]. Website: http://www.stanford.edu/~daydin.