Do Consumers Respond to Future Income Shocks? Evidence from Social Security Reform in Taiwan
Aug 01, 1995
Alec R. Levenson

A basic prediction of both the permanent income hypothesis and life cycle model is that an unexpected increase in future income (a "helicopter drop" of newfound wealth) produces an immediate increase in current consumption. This paper tests that prediction using a natural experiment in Taiwan. The 1985 Labor Standards Law granted all employees in covered industries a windfall retirement/severance benefit.

My results indicate that consumption did not increase for those granted the windfall, relative to those who received nothing. Moreover, consumption for those receiving a greater windfall did not increase relative to those who were granted less.