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One‐shot revenue shocks influence government budget decisions and service provision. However, how governments respond to transitory income remains a theoretical and empirical puzzle. The permanent income hypothesis posits that governments save windfalls to smooth expenditures, while other models predict spending increases. Empirical findings are inconclusive as the focus has been on revenues that are not truly transitory. The case of special and extraordinary gains allows us to investigate the effects of transitory resources. Taking advantage of the Governmental Accounting Standards Board's requirement that governments report such gains in their financial statements, this study examines the effects of gains on expenses for a sample of cities across 10 years. Using a staggered adoption event study design, we find that gains stimulate spending and that the size of gains matters before one observes the stimulatory effects. These results have substantial implications for budgetary transparency and fiscal sustainability in municipal governments.
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Old Age Risks, Consumption, and Insurance
In the United States, after age 65, households face income and health risks, and a large fraction of these risks are transitory. While consumption significantly responds to transitory income shocks, out-of-pocket medical expenses do not. In contrast, both consumption and out-of-pocket medical expenses respond to transitory health shocks. Thus, most US elderly keep their out-of-pocket medical expenses close to a satiation point that varies with health. Consumption responds to health shocks mostly because adverse health shocks reduce the marginal utility of consumption. The effect of health on marginal utility changes the optimal transfers due to health shocks. (JEL D12, E21, G22, G51, I10, J14, J26)
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- Award ID(s):
- 2044748
- PAR ID:
- 10571546
- Publisher / Repository:
- American Economic Review
- Date Published:
- Journal Name:
- American Economic Review
- Volume:
- 114
- Issue:
- 2
- ISSN:
- 0002-8282
- Page Range / eLocation ID:
- 575 to 613
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
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- Free Publicly Accessible Full Text
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Accepted Manuscript1.0
- Journal Article:
- https://doi.org/10.1257/aer.20220555
