What model features and calibration strategies yield a large average marginal propensity to consume (MPC) in heterogeneous agent models? Through a systematic investigation of models with different preferences, dimensions of ex-ante heterogeneity, income processes and asset structure, we show that the most important factor is the share and type of hand-to-mouth households. One-asset models either feature a trade-off between a high average MPC and a realistic level of aggregate wealth, or generate an excessively polarized wealth distribution that vastly understates the wealth held by households in the middle of the distribution. Two-asset models that include both liquid and illiquid assets can resolve this tension with a large enough gap between liquid and illiquid returns. We discuss how such return differential can be justified from the perspective of theory and data.

More on this topic

BFI Working Paper·Jun 17, 2025

The Welfare Effect of Marginal and Nonmarginal Changes in Sales Taxes in the U.S.

Ingvil Gaarder and Lancelot Henry de Frahan
Topics: Economic Mobility & Poverty
BFI Working Paper·May 29, 2025

Transformative and Subsistence Entrepreneurs: Origins and Impacts on Economic Growth

Ufuk Akcigit, Harun Alp, Jeremy Pearce, and Marta Prato
Topics: Economic Mobility & Poverty
BFI Working Paper·Apr 10, 2025

Asylum Seekers and the Rise in Homelessness

Bruce Meyer, Angela Wyse, and Douglas Williams
Topics: Economic Mobility & Poverty