Why do U.S. households save?
In this paper, Colarieti et al. analyze how and why households adjust their spending, saving, and borrowing in response to transitory income shocks using new large-scale survey data. They conduct large-scale online surveys of representative samples of the US working-age population (ages 25-65) who are in the labor force. The main sample consists of 2,923 respondents surveyed between November 2022 and January 2023. The survey collects detailed information on respondents’ socioeconomic background, financial decision-making processes, assets, and liabilities and includes hypothetical scenarios to elicit how respondents would react to income shocks of different sizes and timings. Finally, the authors use Latent Class Analysis (LCA), a machine learning algorithm, to classify households into different “types” based on their financial behaviors and reasoning. Key findings on household responses:
- Marginal propensities to consume (MPCs) are significantly higher immediately following an income shock and diminish over time.
Marginal propensities to deleverage (MPDs) play a critical role in household financial adjustments and show more cross-sectional heterogeneity than MPCs.
Neither MPCs nor MPDs are easily explained by socioeconomic or financial characteristics alone. Adding psychological factors, past experiences, and expectations improves explanatory power. - The authors identify four main types of households based on their reasoning for financial decisions:
Strongly Constrained (18% of sample)
Precautionary (16%)
Quasi-Smoothers (18%)
Spenders (33%)
These household types are not easily predicted by socioeconomic characteristics alone. Within any socioeconomic group, there is a mix of these types.
The How and Why of Household Reactions to Income Shocks
Authors: Roberto Colarieti, Pierfrancesco Mei, Stefanie Stantcheva
From: Harvard University
