Jonathan A. Parker

Consumption Risk and the Cross Section of Expected Returns

This paper evaluates the central insight of the consumption capital asset pricing model that an asset’s expected return is determined by its equilibrium risk to consumption. Rather than measure risk by the contemporaneous covariance of an asset’s return and consumption growth, we measure risk by the covariance of an asset’s return and consumption growth cumulated over many quarters following the return. While contemporaneous consumption risk explains little of the variation in average returns across the 25 Fama‐French portfolios, our measure of ultimate consumption risk at a horizon of three years explains a large fraction of this variation.

Spendthrift in America? on Two Decades of Decline in the U.S. Saving Rate

During the past two decades, the personal saving rate in the United States has fallen from 8% to below zero, and the share of GDP that households consume rose by 6 percentage points. This increase in the share of consumption was concurrent with a reduction in the growth rate of real consumption spending per person, high real rates of return, and an increasing ratio of aggregate wealth to income. Despite this last fact, wealth changes can explain little of the boom in consumption spending: The largest increases in national wealth postdate the consumption boom, and households with differing wealth levels nevertheless had similar increases in consumption. The changing age distribution of the U.S. population does not explain the consumption boom, either: While it may be that younger, wealthier cohorts are driving this boom, the preponderance of evidence suggests rather that the rising consumption-to-income ratio is due to a common time effect. The main findings of the paper are consistent with either an increase in discount rates or a general belief in better economic times in the future. Alternatively, the low rates of saving could be due to a combination of factors, such as the increase in intergenerational transfers from the Social Security system, which has raised the consumption of the elderly, and increased access to credit and an expanded menu of financial instruments raising the consumption of the young.

Precautionary Saving and Consumption Fluctuations

This paper uses the consumption Euler equation to derive a decomposition of consumption growth into four sources. These four sources are new information, and three sources of predictable consumption growth: intertemporal substitution, changes in the preferences for consumption, and incomplete markets for consumption insurance. Using household-level data, we implement this decomposition for the average growth rate of consumption expenditures on nondurable goods in the United States from 1982 to 1997. The economic importance of precautionary saving rivals that of the real interest rate, but the relative importance of each source of movement in the volatility of consumption is not precisely measured.

Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom

This paper argues that taxation of retained profits is particularly distortionary in an economy with good growth prospects and poorly developed financial markets because it primarily reduces the investment of financially constrained firms, investment that has marginal product greater than the after-tax market real interest rate. Contrarily, taxes on distributed profits or capital gains primarily reduce the investment of financially unconstrained firms. Chile experienced a banking crisis over the period from 1982 to 1986 and in 1984 reduced its tax rate on retained profits from 50 percent to 10 percent. We show that, consistent with our theory, there was a large increase in aggregate investment after the reform which was entirely funded by an increase in retained profits. Further, we show that investment grew by more in industries that depend more on external financing, according to the Rajan and Zingales (1998) measure. Finally, we present some weak evidence from comparisons of investment rates across firms for several different measures of their likelihood of being financially constrained.

The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares

We document a large increase in the cyclicality of the incomes of high-income households, coinciding with the rise in their share of aggregate income. In the United States, since top income shares began to rise rapidly in the early 1980s, incomes of those in the top 1 percent of the income distribution have averaged 14 times average income and been 2.4 times more cyclical. Before the early 1980s, incomes of the top 1 percent were slightly less cyclical than average. The increase in cyclicality at the top is to a large extent due to increases in the share and the cyclicality of their earned income. The high cyclicality among top incomes is found for households without stock options; following the same households over time; for post-tax, post-transfer income; and for consumption. We study cyclicality throughout the income distribution and reconcile our findings with earlier work. Furthermore, greater top income share is associated with greater top income cyclicality across recent decades, across subgroups of top income households, and, in changes, across countries. This suggests a common cause. We show theoretically that increases in the production scale of the most talented can raise both top incomes and their cyclicality.

Optimal Time-Inconsistent Beliefs: Misplanning, Procrastination, and Commitment

We develop a structural theory of beliefs and behavior that relaxes the assumption of time consistency in beliefs. Our theory is based on the trade-off between optimism, which raises anticipatory utility, and objectivity, which promotes efficient actions. We present it in the context of allocating work on a project over time, develop testable implications to contrast it with models assuming time-inconsistent preferences, and compare its predictions to existing evidence on behavior and beliefs. Our predictions are that (i) optimal beliefs are optimistic and time inconsistent; (ii) people optimally exhibit the planning fallacy; (iii) incentives for rapid task completion make beliefs more optimistic and worsen work smoothing, whereas incentives for accurate duration prediction make beliefs less optimistic and improve work smoothing; (iv) without a commitment device, beliefs become less optimistic over time; and (v) in the presence of a commitment device, beliefs may become more optimistic over time, and peop...

Accelerator or Brake? Cash for Clunkers, Household Liquidity, and Aggregate Demand

We evaluate the Car Allowance Rebate System (CARS) by comparing the vehicle purchases and disposals of households with eligible “clunkers” to those of households with similar, but ineligible, vehicles. We find that CARS caused roughly 500,000 purchases during the program period and that the liquidity provided by CARS was critical for generating this large response. CARS provided less liquidity for households owning clunkers securing loans, since participation required loan repayment. The participation rate of these households was low, which we attribute to liquidity constraints and distinguish from the effects of other indebtedness, household income, and the size of the program subsidy.