Luigi Briglia

This paper investigates the role of expenditure risk (ER)—persistent, unpredictable spending shocks—in shaping household wealth loss dynamics. Using PSID data (1999–2021), I document that, on average, 10% of U.S. households see their net worth drop to zero or negative levels between consecutive survey waves. While standard models attribute these transitions to income fluctuations, my empirical analysis finds that ER explains 6.73% of these wealth loss episodes, compared to 2.27% for transitory income risk, while permanent income risk plays no role. To rationalize these findings, I develop a heterogeneous-agent model in which ER enters as persistent shocks to the marginal utility of a fraction of the household consumption basket. The model shows that ER creates a wedge in the intertemporal Euler equation, altering optimal savings behavior and amplifying financial vulnerability. This mechanism generates wealth loss episodes consistent with the data and reveals how ER affects household wealth accumulation beyond income shocks alone. This paper highlights a previously overlooked driver of household dynamics by jointly identifying ER alongside income risk and explaining their differential impact on wealth loss.

We pose a new rationale for precautionary savings based on type one extreme value preference shocks. In this framework, the errors of the Euler equation that predicts consumption based on observables has the same properties as the data: the log errors are an affine increasing function of cash in hand. This is not the case with the more standard shocks to the marginal utility of consumption. We characterize the solution to the households’ problem showing how the familiar formulas from static and discrete settings adapt to dynamic and continuous environments. We also show how the existence of these shocks provides utility-enhancing consumption opportunities that justify additional savings beyond those generated by environments with shocks to earnings, something that does not happen with standard shocks to marginal utility. The properties of the Euler equation errors allows us to estimate jointly risk aversion and the variance of the preference shocks.