Essay on Credit Access, Consumption Responses and Uncertainties

This thesis consists of two chapters on examining 1) why wealthier households exhibit larger consumption responses to new credit access and 2) how life-cycle structure and credit access shape household consumption responses to income shocks. In the first chapter of this thesis, we study why wealthier households exhibit larger consumption responses to new credit access, a pattern documented in recent empirical work. We develop a heterogeneous-agent model in which households face infrequent but sizable expenditure shocks and can use credit to smooth consumption. In the model, low-wealth households are frequently constrained and use credit primarily to meet immediate needs, while higher-wealth households adjust borrowing more flexibly and increase consumption more on average when credit becomes available. This generates a cross-sectional pattern in which consumption responses rise with wealth, consistent with the data. Quantitative simulations show that expenditure shocks alone cannot fully reproduce the empirical gradient, but incorporating income uncertainty substantially improves the fit. Our results highlight the importance of precautionary behavior and balance sheet heterogeneity in shaping consumption responses to credit access. The second chapter of this thesis studies how life-cycle structure and credit access shape household consumption responses to income shocks in incomplete-market economies. While the Permanent Income Hypothesis predicts weak responses to transitory income changes, empirical evidence documents substantial excess sensitivity of consumption. We bridge life-cycle models and modern heterogeneous-agent frameworks by embedding finite lives, mortality risk, and limited credit access into a Huggett-style economy. We decompose the differences in aggregate marginal propensities to consume (MPCs) between the perpetual-youth model of Kaplan and Violante (2022) and a finite-life life-cycle economy, showing that finite horizons and age-dependent mortality substantially raise aggregate MPCs, driven by elevated consumption responses late in life, while accounting for the empirical age distribution partially offsets this effect. We then study how credit access affects consumption across the wealth distribution, finding that the model generates heterogeneous MPCs consistent with empirical evidence and highlighting the central roles of life-cycle considerations and credit access in shaping consumption dynamics.