The Liquid Hand-to-mouth: Evidence from a Personal Finance Management Software

Michaela Pagel, Arna Vardardottir

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

We use a very accurate panel of all individual spending, income, balances, and credit limits from a financial aggregation app and document significant payday responses of spending to the arrival of both regular and irregular income. These payday responses are clean, robust, and homogeneous for all income and spending categories throughout the income distribution. Spending responses to income are typically explained by households’ capital structures: households that hold little or no liquid wealth have to consume hand-tomouth. However, we find that few individuals hold little or no liquidity and also document that liquidity holdings are much larger than predicted by state-of-the-art models explaining spending responses with liquidity constraints due to illiquid savings. Given that present liquidity constraints do not bind, we analyze whether individuals hold cash cushions to cope with future liquidity constraints. To that end, we analyze cash holding responses to income payments inspired by the corporate finance literature. However, we find that individuals’ cash responses are consistent with standard models without illiquid savings and neither present nor future liquidity constraints being frequently binding. Because these models are inconsistent with payday responses, we feel that the evidence suggests the existence of households that spend heuristically and call those the “liquid hand-to-mouth.”
Original languageEnglish
Publication date2016
Number of pages51
Publication statusPublished - 2016
Event2016 Annual Meeting of the Society for Economic Dynamics - Toulouse, France
Duration: 30 Jun 20162 Jul 2016
https://www.economicdynamics.org/2016-sed-meeting/

Conference

Conference2016 Annual Meeting of the Society for Economic Dynamics
CountryFrance
CityToulouse
Period30/06/201602/07/2016
Internet address

Cite this

Pagel, M., & Vardardottir, A. (2016). The Liquid Hand-to-mouth: Evidence from a Personal Finance Management Software. Paper presented at 2016 Annual Meeting of the Society for Economic Dynamics , Toulouse, France.
Pagel, Michaela ; Vardardottir, Arna . / The Liquid Hand-to-mouth : Evidence from a Personal Finance Management Software. Paper presented at 2016 Annual Meeting of the Society for Economic Dynamics , Toulouse, France.51 p.
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Pagel, M & Vardardottir, A 2016, 'The Liquid Hand-to-mouth: Evidence from a Personal Finance Management Software' Paper presented at, Toulouse, France, 30/06/2016 - 02/07/2016, .

The Liquid Hand-to-mouth : Evidence from a Personal Finance Management Software. / Pagel, Michaela; Vardardottir, Arna .

2016. Paper presented at 2016 Annual Meeting of the Society for Economic Dynamics , Toulouse, France.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - The Liquid Hand-to-mouth

T2 - Evidence from a Personal Finance Management Software

AU - Pagel, Michaela

AU - Vardardottir, Arna

PY - 2016

Y1 - 2016

N2 - We use a very accurate panel of all individual spending, income, balances, and credit limits from a financial aggregation app and document significant payday responses of spending to the arrival of both regular and irregular income. These payday responses are clean, robust, and homogeneous for all income and spending categories throughout the income distribution. Spending responses to income are typically explained by households’ capital structures: households that hold little or no liquid wealth have to consume hand-tomouth. However, we find that few individuals hold little or no liquidity and also document that liquidity holdings are much larger than predicted by state-of-the-art models explaining spending responses with liquidity constraints due to illiquid savings. Given that present liquidity constraints do not bind, we analyze whether individuals hold cash cushions to cope with future liquidity constraints. To that end, we analyze cash holding responses to income payments inspired by the corporate finance literature. However, we find that individuals’ cash responses are consistent with standard models without illiquid savings and neither present nor future liquidity constraints being frequently binding. Because these models are inconsistent with payday responses, we feel that the evidence suggests the existence of households that spend heuristically and call those the “liquid hand-to-mouth.”

AB - We use a very accurate panel of all individual spending, income, balances, and credit limits from a financial aggregation app and document significant payday responses of spending to the arrival of both regular and irregular income. These payday responses are clean, robust, and homogeneous for all income and spending categories throughout the income distribution. Spending responses to income are typically explained by households’ capital structures: households that hold little or no liquid wealth have to consume hand-tomouth. However, we find that few individuals hold little or no liquidity and also document that liquidity holdings are much larger than predicted by state-of-the-art models explaining spending responses with liquidity constraints due to illiquid savings. Given that present liquidity constraints do not bind, we analyze whether individuals hold cash cushions to cope with future liquidity constraints. To that end, we analyze cash holding responses to income payments inspired by the corporate finance literature. However, we find that individuals’ cash responses are consistent with standard models without illiquid savings and neither present nor future liquidity constraints being frequently binding. Because these models are inconsistent with payday responses, we feel that the evidence suggests the existence of households that spend heuristically and call those the “liquid hand-to-mouth.”

M3 - Paper

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Pagel M, Vardardottir A. The Liquid Hand-to-mouth: Evidence from a Personal Finance Management Software. 2016. Paper presented at 2016 Annual Meeting of the Society for Economic Dynamics , Toulouse, France.