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April 15, 2026
Original Paper
Consumption Response to Anticipated Income Changes: Evidence from the Magnitude Effect
SSRN · 6576053
The Takeaway
Economists used to think we spend a consistent percentage of any new income we receive. This study proves we are much weirder: we spend 76% of small windfalls but only 14% of large ones. It seems humans only switch on their 'rational brain' when the stakes are high enough to be worth the mental effort. For small amounts, we treat it like 'mad money' and go on a spree. This means government stimulus checks are most effective at boosting the economy when they are small and frequent, rather than large and one-off.
From the abstract
We study how household consumption responds to a positive and anticipated income shock: the completion of fixed-schedule car loan repayments. Using novel individual-level panel data from the Bank of Korea, we document a magnitude effect in which the behavioral response depends critically on the size of the anticipated income change. In response to small payments, consumption exhibits pronounced excess sensitivity, with marginal propensities to consume (MPCs) of 0.76. In contrast, large payments