Seminar 218, Psychology and Economics (Joint with Development Seminar): Job Displacement Insurance and (the Lack of) Consumption-Smoothing

Seminar: Psychology and Economics | February 18 | 2-3:30 p.m. | 648 Evans Hall

 Francois Gerard, Columbia University

 Department of Economics

ABSTRACT: We study the spending profile of workers who experience both a positive transitory income shock (lump-sum severance pay) and a negative permanent income shock (layoff ). Using de-identified expenditure and employment data from Brazil, we show that workers increase spending at layoff by 35% despite experiencing a 14% long-term loss. We find high sensitivity of spending to cash-on- hand across consumption categories and for several sources of variation, including predictable income drops. A model with present- biased workers can rationalize our findings, and highlights the importance of the timing of benefit disbursement for the consumption- smoothing gains of job displacement insurance policies.

Joint with Development Seminar