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Abstract:
20% of U.S. households are \wealthy hand-to-mouth” who hold only illiquid assets. But why should they do so, since higher-yielding liquid assets are available? To rationalize this behavior, we build a life-cycle model with non-standard preferences: households are tempted to consume their liquid assets, and therefore purchase housing as a savings commitment device. As a result, households choose to be \wealthy hand-to-mouth” to obtain the \commitment benet” from housing. The model matches the fraction of hand-to-mouth households, rationalizes the heterogeneity in the marginal propensity to consume, and is consistent with micro evidence that households achieve higher savings through homeownership, none of which traditional models can explain.
