Why Don’t Households Smooth Consumption? Evidence from a 25 million dollar experiment*

Households who regularly report spending in the Nielsen Consumer Panel in 2008 were surveyed about financial and behavioral characteristics as well as their receipt of an Economic Stimulus Payment. Using roughly 25 million dollars in reported payments and the random timing of payments, this paper relates household characteristics to the propensity of households to spend pre-announced, lump-sum income on arrival. The average household spends a highly statistically significant amount on arrival and most of the spending is done by households with low liquidity. Models of beliefs do not explain this result: most households expect the payment, and increases in spending are similar between those expecting and not expecting payments. The propensity to increase spending is not transitory. Increases in spending are highly associated with low income in 2006 and with being the type of person that spends and lives for today, suggesting little role for current or recent income shocks or liquidity management with illiquid assets but instead consistent with an important role for preferences. Levels of sophistication or planning are also associated with consumption smoothing: increases in spending are greater for households that make more use of coupons or deals or that have made financial plans. Finally, there is scant evidence for an important role for the available measures related to procrastination or self-control