EXCESS SENSITIVITY AND ASYMMETRIES IN CONSUMPTION - AN EMPIRICAL-INVESTIGATION

Most empirical studies on liquidity constraints classify a consumer as being constrained on the basis of a single indicator such as the asse t-to-income ratio. In this analysis. we model the probability that a c onsumer faces liquidity constraints as a function of multiple social a nd economic factors. This probability function is estimated simultaneo usly with the degree of excess sensitivity of consumption to income in a switching regressions framework. The switching regressions apply op timal weights to the densities for the Euler equations in the two stat es and are less susceptible to sample misclassification. Our results b ased on data from the CEX confirm that liquidity-constrained consumers are excessively sensitive to variables already known to economic agen ts. However. there is also evidence that the unconstrained consumers e xhibit behavior that is inconsistent with the theoretical predictions. Further analysis suggests that such behavior could be explained by ti me-nonseparable preferences.