Marginal Propensity to Consume Durable Goods Out of Unearned Income
Observational StudyReview
Determining how recipients allocate unearned financial windfalls toward physical durables versus liquid savings or leisure is critical for economic consumption models. Standard frameworks require empirical parameters to distinguish real asset acquisition from transient spending.
Picture this
When a household receives regular extra cash payments, rather than spending all the money on daily disposable items, they upgrade major household physical assets like buying a newer car or moving into a more valuable house, often taking on larger mortgages to cover the balance.
What the evidence says
The marginal propensity to consume out of accumulated unearned income is 1.4% for car value and 3.7% for housing value (though net housing wealth effect remains near zero due to proportionally larger mortgages).
- Who was studied
- N = 194 human Massachusetts lottery winners receiving $100,000 or less annually, evaluated alongside N = 496 full sample respondents.
- How
- Cross-sectional multivariate OLS regressions of reported vehicle value and real estate value on accumulated lottery winnings.
What to do
1. Apply a 1.4% allocation coefficient for vehicles and 3.7% for real estate when estimating physical durable asset purchases resulting from multi-year unearned cash transfers.
From the source
"Some of the lottery winnings are spent on cars, with a marginal propensity to consume of 1.4 percent, and housing, with a marginal propensity to consume around 3.7 percent."
Estimating_the_Effect_of_Unearned_Income_on_Labor_Earnings,_Savings.pdf