Marginal Propensity to Save from Unearned Financial Windfalls
Observational StudyReview
Determining how recipients allocate large financial windfalls between immediate consumption and long-term asset accumulation is critical for predicting national savings and macroeconomic stability [11, 14]. Standard economic models require empirical parameters on how much of a multi-year annuity stream gets preserved as net financial wealth over time [11, 15].
Picture this
Think of receiving a large water delivery every month for 20 years. Instead of drinking or splashing all the extra water immediately, a household fills a storage tank with a fixed portion of each delivery so that water remains available long after the monthly deliveries eventually dry up.
What the evidence says
Lottery winners accumulate financial savings with a marginal propensity to save (MPS) of approximately 16% (specifically 15.8% with standard error 5.6%) of total accumulated prize money received midway through the payout period [10, 11, 20].
- Who was studied
- Subsample of N = 194 human lottery winners in Massachusetts receiving $100,000 or less annually, evaluated approximately 10 years into a 20-year payout schedule [2, 5, 16].
- How
- Survey-based measurement of accumulated financial assets (retirement accounts, stocks, mutual funds, savings) regressed against accumulated lottery payments using multivariate OLS models with individual control variables [17-19].
What to do
1. Calculate long-term capital accumulation from multi-year annuity payouts by multiplying total received disbursements by an empirical savings factor of 0.16.
From the source
"Adding up the two savings measures leads to similar results, with our preferred estimate of the marginal propensity to save out of unearned income based on the sample without nonwinners and big winners equal to 15.8 percent (5.6 percent)." [20]
Estimating_the_Effect_of_Unearned_Income_on_Labor_Earnings,_Savings.pdf