Latent Heterogeneity in the Marginal Propensity to Consume

Abstract We estimate the unconditional distribution of the marginal propensity to consume (MPC) using clustering regression applied to the 2008 economic stimulus payments. By deviating from the standard approach of estimating MPC heterogeneity using interactions with observables, we can recover the full distribution of MPCs. We find households spent between 4 and 133% of the rebate within a quarter, and individual households used rebates for different goods. While many observable characteristics correlate individually with our estimated MPCs, most of these relationships disappear when tested jointly. Notable exceptions are income and the average propensity to consume, which correlate positively with the MPC. Household observable characteristics explain only 8% of MPC variation, highlighting the role of latent heterogeneity.