Research / BFI Working PaperJun 30, 2021

How Americans Respond to Idiosyncratic and Exogenous Changes in Household Wealth and Unearned Income

Mikhail Golosov, Michael Graber, Magne Mogstad, David Novgorodsky

We study how Americans respond to idiosyncratic and exogenous changes in household wealth and unearned income. Our analyses combine administrative data on U.S. lottery winners with an event-study design that exploits variation in the timing of lottery wins. Our first contribution is to estimate the earnings responses to these windfall gains, finding significant and sizable wealth and income effects. On average, an extra dollar of unearned income in a given period reduces pre-tax labor earnings by about 50 cents, decreases total labor taxes by 10 cents, and increases consumption by 60 cents. These effects are heterogeneous across the income distribution, with households in higher quartiles of the income distribution reducing their earnings by a larger amount. Our second contribution is to develop and apply a rich life-cycle model in which heterogeneous households face non-linear taxes and make earnings choices along both intensive and extensive margins. By mapping this model to our estimated earnings responses, we obtain informative bounds on the impacts of two policy reforms: an introduction of UBI and an increase in top marginal tax rates. Our last contribution is to study how additional wealth and unearned income affect a wide range of behavior, including geographic mobility and neighborhood choice, retirement decisions and labor market exit, family formation and dissolution, entry into entrepreneurship, and job-to-job mobility.

More Research From These Scholars

BFI Working Paper Aug 6, 2020

How Much Should We Trust Estimates of Firm Effects and Worker Sorting?

Stéphane Bonhomme, Kerstin Holzheu, Thibaut Lamadon, Elena Manresa, Magne Mogstad, Bradley Setzler
Topics:  Employment & Wages
Journal Article Nov 1, 2018

Local Governments, In-Kind Transfers, and Economic Inequality

Rolf Aaberge, Lasse Eika, Audun Langørgen, Magne Mogstad
Topics:  Uncategorized
BFI Working Paper May 2, 2022

Investing in Early Childhood Development in Preschool and at Home

Greg Duncan, Ariel Kalil, Magne Mogstad, Mari Rege
Topics:  Early Childhood Education