FWF PAT2152425: MPCs & LSEs

Wider research context. Do individuals respond differently to aggregate income shocks compared to idiosyncratic ones, and if so, why? By integrating insights from behavioral, labor, and macroeconomics, this project examines how different income shocks shape individual consumption and labor market decisions. The project addresses critical and underexplored questions, promising to fill key gaps in the literature, offer actionable insights for policymakers, and lay the groundwork for future research.

Objectives. We estimate marginal propensities to consume (MPCs) and labor supply elasticities (LSEs) in response to different types of income shocks across many countries, focusing on novel variations in income shocks that are highly relevant yet underexplored compared to the commonly studied idiosyncratic-transitory shocks. These novel distinctions include idiosyncratic-permanent, aggregate-transitory, and aggregate-permanent income shocks. This project also deepens the understanding of heterogeneity in MPCs and LSEs by leveraging cross-country variation rather than relying on single-country data and exploring previously unexamined factors, such as culture, trust, and experiential influences. Finally, the project will be the first to study the interplay between spending and labor supply decisions at the individual level.

Methods. To estimate MPCs and LSEs consistently across countries, we extend existing methods by employing a vignette-based approach. The project involves designing and conducting a large-scale online survey experiment across 20 countries. Participants will be presented with various types of hypothetical income shocks and asked to report their expected dynamic adjustments in consumption and labor supply. This cross-national design provides a unique opportunity to generate globally comparable insights into the determinants of spending and labor supply behavior.

Level of originality. The project advances our understanding of individuals' consumption and labor supply responses to income shocks, emphasizing their heterogeneity and intra-household interplay. This work addresses significant gaps in the literature, making it both highly original and relevant. It also provides valuable insights for designing optimal policies, as most policies tend to generate aggregate-permanent rather than idiosyncratic-transitory income effects. Given the novelty, relevance, and scope of the proposed research, our goal is to publish the findings in top international journals. Recognizing the societal importance of the issues we explore, we will also prioritize disseminating results through policy-oriented outlets.

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