Ricardian Equivalence and Consumption Response to Government Transfers: Behavioral Motives Meet Savers and Spenders in the Real World

Wei-Kang Wong1

Abstract

This paper uses survey to empirically investigate to what extent Ricardian

equivalence and other behavioral motives affected the consumption response of real-

world decision makers to government transfers in Singapore. Furthermore, it explores

how consumption response and the appeal of different motives might be related to

personal characteristics. In the sample surveyed, savers were mostly driven by the

motive of precautionary saving, followed by Ricardian equivalence, while spenders

were motivated by rule of thumb based on mental accounting or norms, followed by

present bias. Older, better educated, and economically better-off individuals facing

no liquidity constraint were more likely to be savers.

JEL Codes: D91, E21, E62, H31

Keywords: Ricardian Equivalence, Mental Accounting, Precautionary Savings,

Present Bias, Rule-of-Thumb Consumers

1 Department of Economics, National University of Singapore, AS2, 1 Arts Link, Singapore 117570, Republic of Singapore. Email: ecswong@nus.edu.sg; Phone: (65) 6516-6016; Fax: (65) 6775-2646. I especially thank George Akerlof for encouragement, Jack Knetsch for comments, and Alan Yap for research assistance. I also thank participants at the joint symposium of Yonsei University, Keio University, University of Hong Kong, Fudan University and the National University of Singapore for comments and Yu Zengyang, Chua Thiam Hao, and Kevin Khoo Hng Kiat for their assistance. As the rule of thumb, I should be solely responsible for any remaining errors.

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1. Introduction

In his budget speech on 17 February 2006, the Prime Minister and Minister for

Finance of Singapore Mr. Lee Hsien Loong announced that in view of the robust

economic performance and the positive economic outlook, the government had

decided to share the fruits of economic growth with its citizens by giving a number of

one-off transfers and rebates to all Singaporeans in Financial Year (FY) 2006 under

the so-called Progress Package, with larger transfers to the less well-off.2 The total

package was estimated to amount to S$2.6 billion.3

Using survey, this paper empirically investigates the extent to which

competing behavioral motives might have influenced the consumption and saving

decisions of real-world decision makers with regard to these transfers. In other words,

if people purported to have spent the transfers, what motivated their spending decision?

On the other hand, if people reported to have saved the transfers, what triggered their

saving decision? The baseline in standard textbooks is of course the motive of

Ricardian equivalence: if consumers have rational expectations and intend to leave

positive bequest, with perfect capital market and lump-sum taxes, their consumption

should remain unchanged because these transfers would not change their

intertemporal budget constraints.

However, many behavioral motives may also affect the recipients’ saving and

consumption decisions. For example, people may save these transfers for

precautionary reasons, either because government transfers are generally associated

with the expectations of greater economic uncertainties or because saving is the norm

for prudent household budgeting when one is generally uncertain about the future.

After all, a government is more likely to give transfers in anticipation of bad times, 2 See http://www.mof.gov.sg/budget_2006/index.html for the speech. “Progress” is an acronym for Providing Opportunities through Growth, Remaking Singapore for Success. 3 At the end of 2006, S$1 = US$0.65. The average exchange rate during 2006 was S$1=US$0.63.

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the optimistic rhetoric behind the transfers notwithstanding.4 More importantly, there

are many reasons why people may be motivated to spend the transfers. The usual

suspects include liquidity or borrowing constraints, non lump-sum taxes, mental

accounting, near rationality, myopia or present-bias, population turnover and the entry

of new households, the expectations that the government may not raise future taxes

(for example because people expect the government to cut future spending or to

finance the transfers using past accumulated surpluses).5

The survey first asks the respondents whether they spent the transfers; there

should be no self-reported spenders for the benchmark Ricardian equivalence

proposition to hold. It then summarizes and presents standard theories of Ricardian

equivalence and non-equivalence in plain English, and asks the respondents to choose

the statements that best describe how they felt about the transfers. Thus, the survey

puts competing theories in a popularity contest. Following Blinder’s (1994) work on

price stickiness and Shiller’s (1996) work on inflation aversion, the survey is

motivated by the belief that even though a person may not be cognitively conscious of

the chain of reasoning that he uses to arrive at his consumption decision or be able to

give an intellectually coherent explanation of his consumption behavior, if the idea is

explained to him colloquially, he should recognize and agree with it.

In the sample surveyed, there were more self-reported spenders (who reported

having spent the transfers or planning to do so soon) than savers (who reported having

saved the transfers). Among savers, precautionary saving – saving for rainy days –

turns out to be the most important motivation, followed by the motive of Ricardian

4 The opposition party has questioned the timing of the transfers, arguing that these transfers were an election ploy to get votes (which the government dismissed) because the transfers were given out in a year of budget deficit, not surplus. See http://wpsgnews.blogspot.com/2006/02/straits-times-wp-chief-draws-fire-for.html. 5However, this last reason may be quite unique to Singapore because most countries have accumulated debts from deficits, not surpluses.

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equivalence. This finding suggests that testing the Ricardian equivalence proposition

by examining consumption choices alone may over-estimate its validity. In contrast,

rule of thumb that treats cash receipts and savings as nonfungible holds the most

appeal to spenders, followed by present bias that weighs current consumption much

more than all future consumption.

Regressing the respondents’ consumption choice on their chosen explanations

using the logistic regression, I find that present bias has the largest positive effect on

the propensity to spend the transfers, followed by rule of thumb, the entry of new

households, and non lump-sum taxes respectively. On the other hand, precautionary

saving has the largest negative effect on the propensity to consume, followed by

Ricardian equivalence. The effect of bequest motive is quantitatively small and not

statistically significant at the conventional levels. Relaxing the liquidity constraint

when it binds always raises consumption.

The qualitative results are robust to the budgetary expectations of the

respondents, although having the Ricardian expectations – the expectations that future

taxes would rise as a result of the transfers – does make the Ricardian equivalence

explanation more popular. Higher educational attainment in general does not make

the motive of Ricardian equivalence more likely, though age does. Despite its

prevalence, precautionary saving is not significantly related to any individual

characteristics, suggesting its general appeal to all.

2. The Policy Background and Literature Review

While the Progress Package gave transfers to every Singaporean, it gave larger

transfers to the less well-off to achieve specific social objectives. There were six

different schemes under the Progress Package, of which three – the growth dividends,

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NS bonus and the Workfare bonus – involved cash transfers.6 The survey focuses on

these three transfers, which accounted for 78% of the total value of the package.

A. Growth Dividends

Under this scheme, all citizens above the age of 21 would receive a one-off

transfer ranging from S$200 to S$800, depending on their income and wealth, as

measured by their annual assessable income and the estimated annual rent of their

home (as assessed by the tax authority). Thus, lower income individuals who lived in

smaller homes would get a larger transfer under this scheme.7 This scheme was

expected to amount to S$1.43bn. The following table summarizes the eligibility

criteria.

Estimated Annual Rent of Home ≤ $6000

$6000 < Estimated Annual Rent of Home ≤ $10000

Estimated Annual Rent of Home > $10000

Annual Assessable Income ≤ $24000 $800 $600

Annual Assessable Income > $24000 $600 $400

$200

B. Workfare Bonus

Expected to amount to S$0.4bn, this scheme gave cash transfers to older, low-

wage workers to reward regular and productive work.8 Specifically, the workers must

be at least forty years old, had an average monthly income of S$1,500 or less, lived in

a property with an estimated annual rent of S$10,000 or less, and had worked for at

6 The other three schemes included utilities and rental rebates, top-ups of social security funds and accounts, subsidies to public schools and self-help groups for specific purposes. See http://www.progress.gov.sg for details. 7 An annual assessable income of S$24,000 was chosen as the cutoff because this was roughly the median wage. Generally, an annual value of home of S$6000 would include the 1, 2, 3, and 4-room Housing and Development Board (HDB) flats, which are public flats built by HDB, a statutory board that is responsible for the building and maintenance of public housing estates in Singapore. It is worth noting that more than 80% of the Singaporean lives in HDB flats that they own (not rented). 8 90% of the bonus would be paid in cash. The remaining 10% of the bonus would be credited into the recipients’ Medisave account to help build up their savings to take care of their healthcare needs.

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least six continuous months in the calendar year.9 The amount received would depend

on the worker’s average monthly income, as the following table reveals.

Average Monthly Income Amount of Workfare Bonus [0, $400] 1.5 months salary with a minimum bonus of $75 ($400, $900] $600 ($900, $1200] $400 ($1200, $1500] $200

C. 40th Anniversary National Service (NS) Bonus

Expected to amount to S$0.2bn, this scheme gave cash transfers to all National

Servicemen who were serving or had served their NS to recognize their contributions

to national defense.10 The following table summarizes the eligibility criteria.

NS Status Amount Full-time national servicemen (NSFs) $100 Operationally ready NSmen who have not completed their Operationally Ready National Service (ORNS) training cycle11 NSmen who have completed their ORNS training cycle NSmen who are above statutory age (i.e. 40 years old for non-officers and 50 years old for officers)

$400

Behavioral Motives for Consumption Response to Government Transfers

The Ricardian equivalence proposition is the standard theoretical benchmark

to think about the consumption response to government transfers: holding constant

current and future government spending, tax cuts or government transfers simply

change the timing of taxation and shift the tax burden to the future, leaving

individuals’ lifetime budget constraint, hence consumption unchanged.12

9 A monthly income of S$1,500 corresponds roughly to the 30th percentile of the income distribution. An eligible worker could receive Workfare Bonus twice: eligible workers who had worked continuously for at least six months in 2005 would receive a cash transfer on 1 May 2006. Similarly, if they had worked for at least six consecutive months in 2006, they would receive another cash transfer on 1 May 2007. 10National service is compulsory for all male Singaporeans and now lasts for two years full-time. 11 For details, see http://www.mindef.gov.sg/imindef/mindef_websites/topics/nsmen/home.html 12 This idea was first proposed (though ultimately rejected) by David Ricardo. See Buchanan (1976) and O’Driscoll (1977). See Ricciuti (2003) for a review of literature on Ricardian equivalence. See David Romer’s (2006) Advanced Macroeconomics for the standard textbook treatment of this topic.

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There are many reasons why Ricardian equivalence may fail. First, with

population turnover and the entry of new households, some of the future tax burden

will be borne by the new households who are not alive at the time of the transfers.13

Thus, the transfers increase the lifetime resources of the individuals who are currently

living, thereby raising their consumption. However, Barro (1974) argues that if

individuals care about the welfare of their descendants and they are happy with the

division of resources between themselves and their descendants before the transfers,

then they will use bequests to restore the original intergenerational division: they will

simply save the transfers for the generation that has to bear the future tax liability.14

Second, there may be liquidity or borrowing constraints. With the transfers,

the government is effectively borrowing on the household’s behalf. If household

either cannot borrow on its own or can only borrow at a higher interest rate than the

government, then the transfers relax the household’s budget constraint, making higher

consumption feasible (Tobin, 1980; Hubbard and Judd, 1986).15

Third, Ricardian equivalence can also fail because of the non lump-sum nature

of taxes (Barsky, Mankiw and Zeldes, 1986). Many households have a small amount

of saving that they use in the event of sharp falls in income or emergency spending

needs, i.e., they exhibit buffer-stock saving behavior (Deaton, 1991). This type of

saving can be explained by a combination of a high discount rate and precautionary

saving (Carroll, 1992 and 1997).16 With taxes as a function of income, a combination

13 The arguments apply equally to a tax cut and a government transfer. However, this paper focuses on the case of a transfer henceforth. 14 Nevertheless, these intergenerational links would break down for individuals with no offspring (Tobin and Buiter, 1980). 15 However, take into account the households’ higher tax liabilities in the future due to the bond issue, rational lenders should reduce the amount they are willing to lend. In some cases, the amount of lending falls one-for-one with government bond issues and Ricardian equivalence may hold even with liquidity constraint (Hayashi, 1987; Yotsuzuka, 1987). 16 Precautionary saving can arise due to the combination of a positive third derivative of the utility function and uncertainty about future income (Leland, 1968). More uncertainty raises the expected marginal utility for a given level of expected consumption, giving more incentive to save.

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of government transfers today and higher taxes in the future raises the household’s

lifetime after-tax income if its future income is low, and vice versa, thereby reducing

the variance of the household’s after tax incomes and precautionary saving. Instead,

the households can indulge its high discount rate and consume the transfers. In

Singapore, two main tax burdens on the individuals are income tax (which depends on

income) and the Goods and Services Tax (i.e., GST, which depends on expenditure).

However, the motive of precautionary saving can also cause the recipients to save the

transfers if they associate the handouts with greater economic uncertainties (as

transfers are typically given in bad times). Whether precautionary saving causes the

recipients to save or to spend the transfers is an empirical question that this paper

addresses.

Fourth, people may not be always fully optimizing. The Ricardian

equivalence proposition assumes that people have rational expectations and they are

always fully optimizing in their consumption decisions. However, starting from

optimal consumption, the utility foregone from not re-optimizing in the face of small

income or fiscal shocks is even smaller (only second-order in magnitude) because of

the first order condition at optimal consumption. Thus, such behaviors are near-

rational (Akerlof and Yellen, 1985). Moreover, finding the optimal level of

consumption often involves complex calculations and a great deal of uncertainty that

is difficult to quantify. Because the benefits forgone from not re-optimizing are very

small, even a small optimization cost may prevent fully rational utility-maximizing

consumers from re-optimizing consumption and saving decisions in the face of small

income or fiscal shocks.17

17 Near rationality with small optimization cost can explain why the permanent-income hypothesis describes consumption behavior well for predictable movements in income that are large and regular (Paxson, 1993; Browning and Collado, 2001; Hsieh, 2003), whereas small and irregular predictable changes in income are associated with substantial predictable changes in consumption (for example,

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However, not re-optimizing in the face of small income shocks can mean

either stickiness in consumption – which leads to unchanged consumption – or

stickiness in saving – which causes current consumption to depend on current income.

Campbell and Mankiw (1989) show that as long as there are some rule-of-thumb

consumers who spend out of their current income, Ricardian equivalence will be

violated. Such a rule may be driven by mental accounting, under which incomes

from different sources are treated differently, with higher marginal propensity to

consume out of cash or check receipts, and lower propensity to consume out of

planned savings and wealth (Shefrin and Thaler, 1988). It may also arise from what

the consumers think they should or should not spend, say because of the norms on

what constitute prudent household financial practices (Akerlof, 2007).18

Excess sensitivity of consumption to current income may also arise from the

saliency of current consumption, leading to present bias and self-control problem

(Laibson, 1997). Even if the consumers fully anticipate the future increase in tax

burden and are fully aware of their self-control problem, the consumers will still

spend the transfers, because the cash transfers relax their pre-imposed liquidity

constraint (aimed at self-control). Myopia may aggravate the problem. The myopic

consumers may feel wealthier and consume more because they fail to foresee or

understand the budgetary implications of government transfers.

Shea (1995), Shapiro and Slemrod (1995), Parker (1999), and Souleles (1999)). This is because for large and regular changes in income, the utility lost from repeated failures to re-optimize is likely to exceed the small optimization cost. 18 As Akerlof (2007, p.16) explains, “any model of mental accounting can be translated into a model of norms: just replace the rules of mental accounting as the norms that people think they should follow.” While giving the same outcome, the difference matters to the persistence of rule-of-thumb behavior because mental accounting tends to be thought of as a heuristic for quick decisions (in light of frictions such as optimization cost and bounded rationality) that results in cognitive error and therefore can be corrected over time because people are smart, but norms are embedded in the preferences that results in loss of utility from its deviation and can persist even in the absence of frictions. Mankiw (2000) emphasizes that there are various ways to view the rule-of-thumb behavior. For example, it may also reflect the way people process information to form their estimate of permanent income.

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Empirical Evidence on Ricardian Non-equivalence

Ricardian non-equivalence is closely related to the excess sensitivity of

consumption to current income. Campbell and Mankiw (1989) estimate that about

half of the income goes to rule-of-thumb consumers who simply spend their current

income. Other papers identify predictable changes in income and show that they lead

to predictable changes in consumption (Poterba, 1988; Wilcox, 1990; Shapiro and

Slemrod, 1995; Shea, 1995; Parker, 1999; Souleles, 1999).

To test Ricardian equivalence, some surveys focus on people’s awareness of

the levels of government deficits and indebtedness, and whether they explicitly take

the government’s fiscal position into consideration in their consumption decision.

The findings suggest that people generally have very limited knowledge of

government’s fiscal position and they pay little attention to the government’s fiscal

position in their consumption and saving decision (Gruen, 1991; Mukhopadhyay,

1994; Allers et al., 1998).19

In contrast, the methodology of this paper closely follows that of Blinder

(1994), Schiller (1997), and Bewley (1998), who use surveys to empirically

distinguish different theories of price rigidity, inflation aversion, and wage rigidity

respectively. They generally find support for behavioral motives that lead to non-

neutrality.

19 Gruen (1991) finds that Australian undergraduate economics students have very limited knowledge of the level of Australian Federal Government debt but academic economists tend to highly overestimate the students’ knowledge. Mukhopadhyay (1994) finds that households in Halifax, Canada pay little attention to government’s budget deficits in deciding their own savings. Similarly, Allers et al. (1998) find that Dutch individuals show little knowledge about the size of government deficits and indebtedness and few respondents answer that they do save more to pay for higher taxes in the future when debt increases today. One exception is Conway (1999), who investigates how labor supply reacts to income tax-financed deficit. Using PSID data from University of Michigan, Conway (1999) finds that a one-dollar increase in the income tax-financed deficit results in a 5-hour increase in current labor supply, a result consistent with Ricardian equivalence.

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3. Methodology and Results

The Survey

The data presented in this paper come from survey questions presented to

people on the streets in typical residential areas (the so-called HDB neighborhoods),

as well as the core financial and commercial districts in Singapore (Raffles Place and

Orchard Road). The two-page survey was presented to the respondents in hardcopy.

Section A collected data on individual characteristics that were related to the amount

of transfers received. Section B contained questions on spending decision with regard

to the transfers and the general level of savings. On the next page, the survey then

turned to the motives behind spending or saving decisions.20 Finally, Section C asked

how the respondents’ budgetary expectations might be affected by the transfers. 21

There are 495 survey responses in total. 22 The responses collected from

different locations are pooled because they yield similar qualitative conclusions. All

respondents were adult citizens who did receive some cash transfers under the

Progress Package. The surveys were conducted retrospectively during late February

to late March 2007, one year after the Package was announced.23

It is natural to ask to what extent the survey sample resembles the population

from which it is drawn. Comparing the distribution of age, educational attainment,

monthly income, and dwelling type between the sample and the population, the

20 With this design, the respondents would first answer the questions on spending decision before they were presented with a list of possible explanations behind their spending decision. 21 See the Appendix for the actual survey form. There were two versions: A and B, which differed only in the order of the explanations in question 4 of Section B to control for possible order effects. However, it is worth noting that the Ricardian equivalence explanation was always listed first so that the respondents could not have missed it if it were an important motive. 22 Out of the 495 survey forms collected, 190 were collected from different HDB neighborhoods (the public housing estates where more than 80% of Singaporeans live), 184 were collected at Raffles Place (the financial district in Singapore), and 121 were collected at Orchard Road (the commercial district in Singapore). 23 The transfers were announced on 17 February 2006. The transfers under Workfare Bonus and NS Bonus were given out on 1 May 2006. To receive transfers under Growth Dividends, an eligible person had to sign up for it anytime from 1 April 2006 to 31 December 2006. So depending on the date that an eligible person signed up for it, the person could receive the transfer as late as early 2007.

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evidence suggests that the survey over-samples respondents who are more educated

(with polytechnic and university degrees), in the younger age groups (between 21 to

35 years old), in the middle income groups24 (with monthly income between S$2,000

to S$4,999), and living in the larger public flats (HDB 4-room, 5-room, and executive

flats).25 In what follows, I will first report the results for the sample surveyed. I will

then investigate how the above characteristics may be related to the consumption

response and the appeal of different motives.

Empirical Results: Save or Spend?

Most of the respondents reported that they had either spent the transfers or

planned to do so in the near future, as Table 1 reveals.26 Out of 495 respondents, 320

persons (64.6% of total) had already spent the transfers. Among 175 respondents who

had not spent the transfers, 58 persons (36.3% of them) planned to spend them soon.

In other words, 378 persons (76.4% of total) had either spent the transfers or planned

to spend them soon. The remaining 23.6% reported that they had not spent the

transfers and they had no plan to spend them in the near future. Most of the

respondents were not liquidity constrained: 86.7% of the sample reported that they

had some savings at the time when they received the transfers and 81.4% reported that

the amount of savings they had was more than the transfers they received.

That most people would spend the transfers is not completely unexpected.

Before the Progress Package, the Singapore government had also made transfers

under the New Singapore Shares (NSS) in 2001 to help the lower income group tide

24 The median household income in year 2005 was S$3,830. At the end of 2006, S$1 = US$0.65. The average exchange rate during 2006 was S$1=US$0.63. 25 See Tables A1-A4 in the Appendix for details. The main reason that the survey over-samples the younger age groups was that the response rate was generally lower for older respondents: they were more reluctant to be surveyed. 26 The survey did not distinguish between those who had spent all or part of the transfers. The focus was on the tendency to consume versus the tendency to save.

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over the economic downturn at the time and the Economic Restructuring Shares (ERS)

in 2003 to offset the increase in the Goods and Services Tax (from 3% to 5%) that

year. However, under the NSS and ERS, the transfers were in the form of shares,

which would earn annual dividends (in the form of bonus shares) for five years after

their issuance if the recipients did not encash their shares. The annual dividends were

3% plus the real GDP growth rate of the preceding calendar year, with a guarantee of

at least 3%.27 However, many chose to encash their shares early instead of waiting

for the dividends, despite the attractive interest rates, suggesting even higher discount

rates. In fact, the government cited the widespread encashment as the reason for

giving the Progress Package in the form of cash checks so that the transfers could be

collected immediately upon allotment.28

Which Theories Best Explain the Behaviors of Savers and Spenders?

Table 2 names eight standard textbook explanations for Ricardian equivalence

or non-equivalence that were evaluated in the survey.29 The basic ideas of the

theories were translated into brief statements in plain English, as reported in Table 2.

The respondents were asked to select the statements that best describe how they felt

about the transfers. They could, and sometimes did, choose more than one statements.

Column (1) reports the percentage of respondents who chose a particular statement

out of a total of 495 respondents. The list of explanations is quite exhaustive: only

3.4% of the respondents could not find any statements to describe how they felt about

the transfers; they selected “others”.

27 The average annual interest rates on saving deposits were 0.77, 0.44, 0.24, 0.23, 0.26, and 0.25 for years 2001-2006 respectively. Similarly, the average annual interest rates on one-year fixed deposits were 1.53, 1.32, 0.70, 0.72, 0.86, and 0.88 for years 2001-2006 respectively. Source: https://secure.sgs.gov.sg/apps/msbs/interestRatesOfBanksAndFinanceCompaniesForm.jsp. 28 For details on the NSS and ERS, see http://www.ers.org.sg/. 29 See, for example, David Romer’s (2006) Advanced Macroeconomics.

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Indeed, as noted by Romer (2006; p.571), “the issue of whether Ricardian

equivalence is a good approximation is closely connected with the issue of whether

the permanent-income hypothesis provides a good description of consumption

behavior.” It turns out that the most popular explanation is rule of thumb based on

mental accounting or norm, which was chosen by 32.5% of the respondents. Using

this rule of thumb, people behave as if incomes from different sources are non-

fungible and they exhibit different marginal propensity to consume out of incomes

from different sources. The next most popular explanation is precautionary saving,

which was chosen by 29.3% of the respondents. The remaining explanations in

descending order of popularity (with percentage choice in parentheses) are: present-

bias (19.6%), Ricardian equivalence (18%), entry of new households (9.9%), non

lump-sum taxes (9.3%), bequest motive (7.9%), and liquidity constraint (7.1%).

The Motives of Savers vs. The Motives of Spenders

If the respondents reported to have saved the transfers, which motive drives

their saving decisions? Conversely, if they claimed to have spent the transfers, which

theory best accounts for their spending decisions? To answer these questions,

columns [1A] and [1B] of Table 2 report the percentage choice of savers and spenders

separately. Savers are defined as those who had not spent the transfers and did not

plan to spend them soon, whereas spenders are those who had spent the transfers or

planned to spend them soon.

Not surprisingly, the popularity contest reveals markedly different patterns for

savers and spenders. For savers, the most popular explanation turns out to be

precautionary saving, which was chosen by 62.4% of savers. Ricardian equivalence

ranks second, followed by the bequest motive; they were chosen by 38.5% and 12.8%

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of savers respectively. The remaining explanations naturally hold little appeal to the

savers because they tend to motivate spending. In descending order of popularity

(with percentage choice in parentheses), they are: rule of thumb (5.1%), non lump-

sum taxes (2.6%), the entry of new households (0.9%), and present-bias (0.9%).

None of the savers chose liquidity constraint.

These findings suggest that it may be important to distinguish between the

theory of Ricardian equivalence – the reason why people do not spend a tax cut or

transfer is because people regard them as a change in the timing of taxation that

leaves their lifetime budget constraint unchanged – and the phenomenon of Ricardian

equivalence – the observation that people do not spend a tax cut or transfer. There are

at least two reasons why this distinction matters. First, methodologically, testing the

theory of Ricardian equivalence by examining only the saving outcome may lead to

misleading conclusion about the mechanism through which saving occurs. Second,

even if we care only about the policy outcome – whether people spend a tax cut or

transfer and whether a tax cut or transfer would stimulate the economy – this

distinction is still important because precautionary saving may depend sensitively on

the amount of uncertainty that people feel at the time of a tax cut or transfer, i.e., it

may be highly context dependent.

For spenders, rule of thumb is the most popular explanation, chosen by 41% of

spenders. Present-bias ranks second and was chosen by 25.4% of spenders.

Precautionary saving also appeals to 19% of spenders and ranks third. The remaining

explanations in descending order of popularity (with percentage choice in parentheses)

are: the entry of new households (12.7%), Ricardian equivalence (11.6%), non lump-

sum taxes (11.4%), liquidity constraints (9.3%), and the bequest motive (6.3%).

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Do the respondents have the Ricardian expectations and do expectations matter?

Nevertheless, Ricardian equivalence holds only if people have the Ricardian

expectations, i.e., if they expect higher taxes in the future because of the transfers.

There are two reasons why people may not expect higher taxes: first, in contrast to

many Western industrialized countries that have been plagued by large and persistent

budget deficits, the Singapore government has run persistent budget and current

account surpluses for many years. Thus, in principle, the government could finance

the transfers using past accumulated surpluses without raising taxes.30 Second and

more generally, people may expect the government to reduce its future expenditures

as a result of the transfers.

Therefore, it is natural to ask whether the findings can be explained by

budgetary expectations. The last section of the survey directly elicits the respondents’

budgetary expectations. Table 3 summarizes the results, showing the percentage of

respondents with different expectations about future taxes and government

expenditures. Most notably, 61.2% of the respondents believed that taxes would be

higher in the future because of the transfers, only 9.3% believed that future

government spending would be lower, and 20.2% were completely clueless about the

budgetary implications of the transfers. Overall, it seems that the findings cannot be

attributed solely to non-Ricardian expectations.31

If the Ricardian expectations are key driver of saving behavior, then Ricardian

equivalence should be more prevalent among those who had the Ricardian

30 Nevertheless, it is worth noting that the Singapore government has been running budget deficits in more recent past and at the time that the transfers were given: it has been running primary deficits during FY2002-2006 and overall budget deficits in FY2001, FY2003-2004, and FY2006. See http://www.mof.gov.sg/budget_2006/budget_speech/downloads/FY2006_Budget_Highlights.pdf 31 In contrast to other countries, the Singapore government has persistently and almost obsessively emphasized the importance of accumulating surpluses for the future due to the country’s lack of natural resources. More importantly, the government has indeed lived up to its words in its budget records. Thus, these expectations may simply reflect people’s belief that the fiscal goal of the Singapore government is to run a budget surplus, not a balanced budget.

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expectations. Furthermore, the popularity contest should yield very different patterns

among those with the Ricardian expectations and those without. To highlight the

effects of expectations, I focus on two groups of respondents which make up more

than eighty percent of the sample: those who believed that taxes would be higher as a

result of the transfers (61.2% of the respondents) and those who were absolutely

clueless about the budgetary implications of the transfers (20.2% of the respondents).

Given their expectations, the first group should be the Ricardian consumers while the

second group should be non-Ricardian. Columns [1] and [2] of Table 4 report the

results of popularity contest for these two groups separately.

Roughly the same fraction of spenders were present in both groups: 75.9%

among those who expected higher taxes and 75.0% among those who admitted that

they did not know how future taxes and spending would be affected by the transfers.

Furthermore, the four most popular explanations appear in exactly the same order for

both groups. In descending order of popularity, they are: rule of thumb, precautionary

saving, present bias, and Ricardian equivalence.32 However, compared to those with

clueless expectations, those who had the Ricardian expectations were more likely to

chose Ricardian equivalence (21.8% vs. 14%), bequest motive (9.9% vs. 6%), the

entry of new households (10.2% vs. 8%), precautionary saving (29.7% vs. 26%), and

present bias (23.1% vs. 14%), and they were less likely to chose liquidity constraint

(5.9% vs. 8%), non lump-sum taxes (8.6% vs. 10%), and rule of thumb (31% vs.

37%).

32 Among those who expected higher taxes, the most popular explanations in descending order of popularity (with percentage choice in parentheses) are: rule of thumb (31%), precautionary saving (29.7%), present bias (23.1%), Ricardian equivalence (21.8%), the entry of new households (10.2%), bequest motive (9.9%), non lump-sum taxes (8.6%) and liquidity constraint (5.9%). In contrast, among those who were clueless about budgetary implications of the transfer, the most popular explanations in descending order of popularity (with percentage choice in parentheses) are: rule of thumb (37%), precautionary saving (26%), present bias (14%), Ricardian equivalence (14%), non lump-sum taxes (10%), the entry of new households (8%), liquidity constraints (8%), and bequest motive (6%).

18

These findings suggest that while budgetary expectations matter, the effect of

expectations can be offset by competing motives with an opposite effect and

expectations alone cannot account for the non-equivalence finding. For example, in

this sample, a large fraction of those with the Ricardian expectations were driven by

motives that encourage spending out of current income: 23.1% of them chose present

bias and 31% chose rule of thumb. These findings also suggest that testing Ricardian

equivalence by testing the subjects’ understanding of the budgetary implications of

government tax or transfer policies can overstate equivalence behavior because there

are many competing drivers of behaviors, of which expectations are but one of them.

Columns [1A] and [2A] of Table 4 compare the results for savers with

different budgetary expectations. Similarly, columns [1B] and [2B] compare the

results for spenders. These comparisons yield the same qualitative conclusions as

above, though the actual percentages depend on expectations.33

Which Motives Exert the Greatest Influence on Behaviors?

A natural question is whether different motives are equally effective in

affecting behavior, especially when the respondents may be torn between competing

motives. To answer this question, I regress the respondents’ self-reported spending

decision on their chosen explanations. The dependent variable is a dummy variable

which equals one for spender, and zero otherwise. The independent variables are

eight dummy variables, each indicating whether a particular explanation was chosen.

33 Among the savers, precautionary saving always emerges as the most popular motive for both groups (63% of those who expected higher taxes and 56% of those who were clueless), followed by Ricardian equivalence (46.6% and 32% respectively) and the bequest motive (16.4% and 8% respectively). They are followed by rule of thumb (2.7% and 8% respectively) and non lump-sum taxes (2.7% and 4% respectively). On the other hand, among the spenders, the three most popular motives (in descending order) are always rule of thumb (40% and 46.7% respectively), present bias (30% and 18.7% respectively), and precautionary saving (19.1% and 16% respectively).

19

For example, the dummy for Ricardian equivalence equals one if the respondent

chose this explanation, and zero otherwise.

Table 5 reports the estimates from maximum likelihood logistic regression.

Column (1) reports the coefficient estimates and column (2) the odds ratios.34 Being

liquidity constrained is an extremely powerful reason for spending the transfers. There

were 35 respondents who chose liquidity constraint and they all spent the transfers.

Because liquidity constraint predicts spending behavior perfectly, the dummy for

liquidity constraint and the 35 respondents who chose it are dropped from the

regression.

All of the estimates are statistically significant at the 10% level, except the

coefficient on the bequest motive, which is also the smallest in magnitude. Three

motives reduce the probability of spending the transfers. They are (in descending

order of statistical and economic significance): precautionary saving, Ricardian

equivalence, and the bequest motive. The effects of precautionary saving and

Ricardian equivalence are statistically significant at the 1% level and 5% level

respectively. Four motives raise the probability of spending the transfers. They are

(in descending order of economic significance): present bias, rule of thumb, entry of

new households, and non lump-sum taxes. The effects of present bias and rule of

thumb are both statistically significant at the 1% level, whereas the effects of entry of

new households and non lump-sum taxes are statistically significant at the 10% level

and 5% level respectively. Thus, not only are precautionary saving, present bias, and

rule of thumb the most popular explanations, they are also the most economically and

statistically significant motives in changing the propensity to consume. 34 The odds ratio for the dummy of an explanation tells us that if that explanation is chosen, the odds of being a spender (i.e., the probability of the respondent spending or planning to spend the transfer divided by the probability of saving the transfer) increases by a factor of the odds ratio. Thus an estimate of odds ratio greater than one (or coefficient estimate greater than zero) raises the odds of spending, and vice versa.

20

Further Evidence on Mental Accounting

Thaler (1999) points out that with mental accounting, funds to spend are

labeled both as flows (regular income versus windfalls) and as stocks (saving, home

equity, pension wealth, etc). Expenditures are also grouped into categories and

spending is sometimes constrained by implicit or explicit budgets. Table 6 reports the

responses to two survey questions that support the above interpretations: 30.2% of the

respondents agreed that they had spent the transfers on things that they would not

otherwise spend on had they not received the transfers. Furthermore, 29.1% either

disagreed or strongly disagreed that if they had received the same amount of money

from their salary, they would have used the money in exactly the way as they had

used the money from the transfers.

Personal Characteristics and the Appeal of Different Motives

Table 7 regresses the respondents’ choices of explanations on their personal

characteristics. Column (1) investigates how an individual’s personal characteristics

affect his consumption decision, using as the dependent variable a dummy variable

which equals one for spender, and zero otherwise. Columns (2) to (9) examine how

personal attributes affect consumption decision through the appeal of different

motives, where the dependent variable in a particular column is a dummy variable

which equals one if a particular explanation is chosen, and zero otherwise. The

estimates reported are the odds ratios from maximum likelihood logistic regressions.

The personal characteristics include a number of ordinal variables (for age

group, educational attainment, income group, dwelling type) and dummy variables

(for female, married persons, Ricardian expectations – the expectations that taxes will

21

be higher because of the transfers – and the clueless regarding the budgetary

implications of transfers).35

The evidence in Column (1) suggests that older, more educated, higher income

individuals dwelling in more expensive residence are less likely to spend the transfers.

The age effect is only marginally statistically significant at the 10% level, whereas

education, income and dwelling type are statistically significant at the 5% level.

Female and married persons are more likely to spend the transfers but the effects are

not statistically significant at the conventional levels. Both budgetary expectations

reduce the probability of spending the transfers but the effects are not statistically

significant at the conventional levels. In fact, the odds ratio for those who expected

taxes to be higher appears no different from the odds ratio of those who were

completely clueless in their budgetary expectations.

Older respondents were more likely to choose Ricardian equivalence and non

lump-sum taxes (both effects are statistically significant at the 10% level), but they

were less likely to choose rule of thumb (the effect is statistically significant at the 1%

level). The stronger appeal of Ricardian equivalence and the weaker appeal of rule of

thumb discourage spending, whereas the stronger appeal of non lump-sum taxes

35 For details on the categories used in the survey, please refer to the survey form in the appendix. For the ordinal variables, the value goes from low to high. Age group ranges between “1” to “9”, where a higher value indicate older respondent: “1” corresponds to those aged between 21-25, “2” to those aged between 26-30, etc. Educational attainment ranges between “1” to “8”, where a higher value indicates higher educational attainment and years of schooling: “1” corresponds to those with less than primary education, “2” to those with primary education, etc. Monthly income ranges between “1” to “11”, where a higher value indicates higher income: “1” corresponds to those who earned less than SGD1,000 in year 2005, “2” to those who earned between SGD1,000 to 1,999, etc. Residential type ranges from “1” to “9”, where higher value generally indicates more expensive residential unit: “1” corresponds to one-room public flat, “2” corresponds to two-room public flat, etc. Values “1” to “7” indicate government-built public housing and values “8” to “9” indicate private housing. Those who chose “Others” as residential unit is assigned a missing value.

22

encourages spending.36 However, the net effect is that older respondents were less

likely to spend the transfers, as noted above.

Generally, there is no statistical evidence that men and women differ

significantly in their spending decisions or motivations except that women seemed

marginally less likely to choose the entry of new households to explain their behavior

and the effect is marginally statistically significant at the 10% level.

Education affects spending because the more educated were much less likely

to be liquidity constrained and the effect is statistically significant at the 1% level.

General educational attainment has no statistically significant effect on the popularity

of Ricardian equivalence, rule of thumb, or present bias.

Income level has no statistically significant effect on the popularity of any of

the explanations even though it reduces the probability of spending the transfers

significantly. Nevertheless, the largest effect appears to work through non lump-sum

taxes: higher income individuals were less likely to think that their tax burden would

be lower in the future – they did not think that they would be earning or spending less

when taxes were raised to finance the transfers.

Naturally, married persons were much more likely to choose the bequest

motive as they were more likely to have children. They were also less likely to be

liquidity constrained. Both effects are statistically significant at the 5% level.

Respondents with more expensive dwellings were presumably wealthier.

They were more likely to choose present bias (which encourages spending and the

effect is only marginally statistically significant at the 10% level) and less likely to

choose rule of thumb (which discourages spending and the effect is highly statistically

36 They think that by the time the government increases the taxes to finance the transfer, their tax burden will be lower because they will be earning and spending less

23

significant at the 1% level). The net effect is that they were less likely to spend the

transfers.

As expected, respondents with the Ricardian expectations were more likely to

choose Ricardian equivalence and the effect is statistically significant at the 5% level.

However, they were also more likely to choose present bias and the effect is

statistically significant at the 10% level. The net effect is that they were not

significantly more likely to save the transfers. In comparison, those who were

completely clueless about the budgetary implications of the transfers were not

inclined to choose any particular explanation.

Finally, despite its overwhelming popularity, the appeal of precautionary

saving is not significantly related to any of the personal characteristics included. This

finding suggests that precautionary saving may be a truly general and powerful

motivation that transcends personal characteristics.

4. Conclusion

Using survey responses to a number of one-off transfers by the Singapore

government, this paper empirically investigates to what extent competing motives

from different theories affected the saving and consumption decisions of transfer

recipients: if people spent the transfers, why did they spend them? If people saved the

transfers, why did they save them?

In the sample surveyed, the most popular explanation for spenders turns out to

be rule of thumb based on mental accounting or norm, whereby the respondents

exhibit different marginal propensities to spend out of cash transfers, their personal

savings and their salaries. Furthermore, nearly one third of the respondents disagreed

that they spent the transfers in the same way that they would spend their salaries, if

24

they had received the same amount of money from their salaries instead. Similar

fraction agreed that they had spent on things that they would not otherwise spend on

had they not received the transfers. Present bias is the next most appealing motive to

the spenders. For savers, the most popular explanation is the motive of precautionary

saving – saving for rainy days – followed by the Ricardian equivalence explanation.

These four motives are the most economically and statistically significant

determinants of the propensity to spend. Budgetary expectations matter but the effect

can be offset by other motives such as present bias. Although there were relatively

few instances of liquidity constraint in the sample, transfers that relaxed the liquidity

constraints were always spent.

Older respondents seem more likely to choose Ricardian equivalence and non

lump-sum taxes and less likely to use rule of thumb. The net effect is that they are

more likely to save the transfers. Higher educational attainment in general has no

statistically significant effect on the appeal of different motives, except reducing the

likelihood of being liquidity constrained. Married couples are more likely to choose

the bequest motive and less likely to be liquidity constrained. None of the personal

characteristics are significantly related to the motive of precautionary saving despite

its overall popularity.

The relative appeal of different motives may be quite sensitive to the specific

context and background of government policy. Investigating the robustness of results

reported here to other episodes of government transfers or tax cuts is a natural next

step on the research agenda.

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25

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Leland, H.E. (1968), “Saving and uncertainty: the precautionary demand for saving,” Quarterly Journal of Economics 82, 465-473. Mankiw, N.G. (2000), “The savers-spenders theory of fiscal policy,” American Economic Review, 90(2), 120-125. Mukhopadhyay, A.K. (1994), “Are Haligonians Ricardian? a survey of households' saving response to the government's budget deficits,” Journal of Socio-Economics 23, 457-77. O'Driscoll, G.P. (1977), “The Ricardian nonequivalence theorem,” Journal of Political Economy, 85(1), 207-210. Parker, J. (1999), “The response of household consumption to predictable changes in social security taxes,” American Economic Review 89, 959-973. Poterba, J.M. (1988), “Are consumers forward looking? Evidence from fiscal experiments,” American Economic Review 78, 413-418. Ricciuti, R. (2003), “Assessing Ricardian equivalence,” Journal of Economic Surveys, 17, 55-78. Romer, D. (2006), Advanced Macroeconomics, McGraw-Hill/Irwin. Shapiro, M.D., and Slemrod, J. (1995), “Consumer response to the timing of income: evidence from a change in tax withholding,” American Economic Review 85, 274-283. Shea, J. (1995), “Union contracts and the life-cycle/permanent-income hypothesis,” American Economic Review 85, 186-200. Shefrin, H.M, and Thaler, R.H. (1988), “The behavioral life-cycle hypothesis,” Economic Inquiry 26, 609-643. Shiller, R. (1996), “Why do people dislike inflation?” in Romer, C., and Romer, D. (Eds.), Reducing Inflation: Motivation and Strategy, National Bureau of Economic Research and University of Chicago Press. Souleles, N.S. (1999), “The response of household consumption to income tax refunds,” American Economic Review 89, 947-958. Thaler, R. (1999), “Mental Accounting Matters,” Journal of Behavioral Decision Making 12, 183-206. Tobin J., and Buiter, W.H. (1980), “Fiscal and monetary policies, capital formation and economic activity.” In G.M. Furstenberg, Ed., The Government And Capital Formation (Cambridge: Ballinger). Wilcox, D.W. (1989), “Social security benefits, consumption expenditure, and the life cycle hypothesis,” Journal of Political Economy 97, 288-304.

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Yotsuzuka, T. (1987), “Ricardian equivalence in the presence of capital market imperfections,” Journal of Monetary Economics 20, 411-436.

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Table 1: Evidence on Spending and Liquidity Constraint Question Number

Question Number “Yes”

Percent “Yes”

B1(i) Have you spent the Progress Package? 320 64.6% B1(ii) If you have not, do you plan to spend it in the near

future? 58 36.3%

B2 Did you have any savings when you received the Progress Package?

429 86.7%

B3 At that time, were your savings more than the amount you received under the Progress Package?

403 81.4%

Notes: The percentage with a “yes” response in the last column is calculated as a percentage among those responded to that particular question.

Table 2: B4. Please choose the statements that best describe how you feel about the Progress Package (Please choose all that are applicable) Theory Brief Description Percentage (%) [1]

Total[1A]

Savers[1B]

Spenders Ricardian Equivalence

I will probably have to pay more taxes in the future because of the Progress Package. So I saved it for the future.

18.0 38.5 11.6

Bequest Motive The future generations will probably have to pay more taxes because of the Progress Package. But not for me. But I am worried for my sons and daughters. So I saved it for them.

7.9 12.8 6.3

Liquidity Constraints

I spent it because I have already spent all my money. If I could borrow some money, I would have borrowed it and spent it.

7.1 0 9.3

Entry of New Households

The future generations will probably have to pay more taxes because of the Progress Package. But not for me. So I do not worry about it and I spent it.

9.9 0.9 12.7

Non Lump-sum Taxes

Other people may have to pay more taxes in the future because of the Progress Package. But not for me. My tax burden will be lower in the future because I will be earning less or spending less when that happens.

9.3 2.6 11.4

Precautionary Savings

I do not know what my taxes will be in the future. But with so much uncertainty, I saved it for the rainy days.

29.3 62.4 19

Present-Bias I will probably have to pay more taxes in the future because of the Progress Package. But I do not worry about the future. I spent it while I could.

19.6 0.9 25.4

Rule of Thumb I do not know what my taxes will be in the future. As a general rule, I just spend whatever I receive in cash or in check, like the Progress Package. But I try not to touch my savings.

32.5 5.1 41

Others Others 3.4 5.1 2.9 Spenders Percentage of Spenders (%) 76.4 0 100 Sample Size Number of Respondents (N) 495 117 378

Table 3: Expectations of Future Taxes and Government Spending C2. Because of the Progress Package, government

spending will probably be ____ in the future. Lower Unchanged Higher Don’t

Know Sum

Lower

0.4 0 0.2 0 0.6

Unchanged

0.6 5.5 3.6 0.6 10.3

Higher

7.1 10.3 30.5 13.3 61.2

Don’t Know

1.2 1.0 5.5 20.2 27.9

C1. Because of the Progress Package, taxes will probably be _____ in the future.

Sum 9.3 16.8 39.8 34.1 100 Note: The entries in the cells are in percentages (%).

31

Table 4: B4. Please choose the statements that best describe how you feel about the Progress Package (Please choose all that are applicable) – by budgetary expectations: sub-sample who expected higher future taxes vs. sub-sample who was clueless Theory Percentage (%) Expect Higher Taxes Clueless Expectations [1] [1A] [1B] [2] [2A] [2B] Total Savers Spenders Total Savers SpendersRicardian Equivalence

21.8 46.6 13.9 14.0 32 8

Bequest Motive

9.9 16.4 7.8 6.0 8 5.3

Liquidity Constraints

5.9 0 7.8 8.0 0 10.7

Entry of New Households

10.2 1.4 13 8.0 0 10.7

Non Lump-sum Taxes

8.6 2.7 10.4 10.0 4 12

Precautionary Savings

29.7 63 19.1 26.0 56 16

Present-Bias

23.1 1.4 30 14.0 0 18.7

Rule-of-Thumb

31.0 2.7 40 37.0 8 46.7

Others

2.6 4.1 2.2 5.0 8 4

Sample Size (N) Percentage of Spenders (%)

303 75.9

73 0

230 100

100 75.0

25 0

75 100

32

Table 5: The Effects of Different Motives on Actual Behavior (Logistic Reg.)

Dummy for Spender Coefficient Estimate Odds Ratio Dummy for Ricardian Equivalence -0.83 0.44 [0.33]** [0.14]** Dummy for Bequest Motive -0.51 0.6 [0.41] [0.25] Dummy for Entry of New Households 2.16 8.7 [1.13]* [9.81]* Dummy for Non Lump-sum Taxes 1.77 5.89 [0.72]** [4.26]** Dummy for Precautionary Saving -1.16 0.31 [0.29]*** [0.09]*** Dummy for Present Bias 3.41 30.23 [1.08]*** [32.68]*** Dummy for Rule-of-Thumb 2.67 14.39 [0.47]*** [6.80]*** Constant 0.79 [0.27]*** N 460 460

Notes: The dummy for liquidity constraint and the 35 respondents who chose liquidity constraint are dropped because they predict spending behavior perfectly. Robust standard errors are in the brackets. * Significant at 10%; ** Significant at 5%; *** Significant at 1%.

33

Table 6: Further Evidence on Mental Accounting B6 Percent “Yes” Did you spend it on things that you would not otherwise spend on had you not received the progress package?

30.2%

B7: Do you agree with the following statement? Percent “No” “If I had not received the Progress Package, but if I had instead received the same amount of money from my salary, I would have used the money in exactly the same way as I had used the Progress Package”

29.1%

Note: Percent “No” refers to the percentage of respondents who answered “Strongly Disagree” or “Disagree.”

Table 7: Logistic Regression of Spending Decision and Motivations on Individual Characteristics (Odds Ratios) Dependent Variable = Dummy for Spending Decision and Motivations

[1] [2] [3] [4] [5] [6] [7] [8] [9]

Spender

Ricardian

Equivalence Bequest Motive

Liquidity Constraint

Entry of New Households

Non Lump-sum Taxes

Precautionary Saving

Present Bias

Rule-of-Thumb

Age Group 0.89 1.15 1.18 0.96 1.14 1.23 0.99 1.03 0.81 [0.06]* [0.09]* [0.13] [0.12] [0.10] [0.13]* [0.06] [0.08] [0.06]*** Female Dummy 1.27 0.69 0.54 0.92 0.57 1.32 1.26 1.02 1.04 [0.29] [0.18] [0.21] [0.36] [0.18]* [0.48] [0.26] [0.24] [0.21] Educational Attainment 0.83 1.11 1.03 0.66 1 0.9 1.11 1.07 1.04 [0.07]** [0.11] [0.15] [0.10]*** [0.12] [0.13] [0.08] [0.11] [0.08] Income Group 0.86 1.02 1.05 0.91 0.96 0.81 0.99 0.96 0.99 [0.06]** [0.09] [0.12] [0.11] [0.10] [0.11] [0.06] [0.08] [0.07] Married Dummy 1.04 0.62 3.55 0.3 1.22 0.68 1.02 0.62 1.5 [0.27] [0.20] [1.81]** [0.17]** [0.41] [0.33] [0.26] [0.20] [0.38] Residential Type 0.86 1.01 0.85 0.86 0.84 0.89 1.04 1.12 0.83 [0.06]** [0.08] [0.11] [0.12] [0.10] [0.11] [0.07] [0.08]* [0.06]*** Ricardian Exp. Dummy 0.69 2.59 2.72 0.63 0.85 0.63 0.99 1.92 1.09 [0.22] [1.00]** [1.69] [0.29] [0.33] [0.27] [0.27] [0.68]* [0.30] Clueless Exp. Dummy 0.62 1.46 1.41 0.64 0.64 0.62 0.96 1.17 1.6 [0.23] [0.69] [1.09] [0.36] [0.32] [0.35] [0.32] [0.52] [0.53] N 469 469 469 469 469 469 469 469 469

Notes: 1. This table reports the odds ratios. 2. Robust standard errors are in the brackets. * Significant at 10%; ** Significant at 5%; *** Significant at 1%.

Appendix 1: The Questionnaire We are researchers from NUS. We are interested in issues related to the Progress Package in budget 2006. The survey is completely anonymous. There are no right or wrong answers to the following questions. We just want your honest answers. Please tick (√) the appropriate boxes. Thanks much! Section A Age: □ Below 21 □ 21-25 □ 26-30 □ 31-35 □ 36-40 □ 41-45 □ 46-50 □ 51-55 □ 56-60 □ >60 Sex: □ Male □ Female Highest Education Attained: □ < Primary □ Primary □ Secondary □ Vocational □ Junior College □ Polytechnic □ University Graduate □ Postgraduate Monthly Income (in 2006): □ <$1,000 □ $1,000-$1,999 □ $2,000-$2,999 □ $3,000-$3,999 □ $4,000-$4,999 □ $5,000-$5,999 □ $6,000-$6,999 □ $7,000-$7,999 □ $8,000-$8,999

□ $9,000-$9,999 □ >$10,000 Marital Status: □ Single □ Married □ Others Current Residential Unit: □ HDB 1 Room □ HDB 2 Room □ HDB 3 Room □ HDB 4 Room □ HDB 5 Room □ HDB Executive □ HUDC □ Private Condominium/Apartment □ Landed Property □ Others How much did you receive under the Progress Package? Growth Dividends $________ Workfare Bonus $________ NS Bonus $________ Section B 1. Have you spent the Progress Package? □ Yes □ No If you have not, do you plan to spend it in the near future?

□ Yes □ No 2. Did you have any savings when you received the Progress Package? □ Yes □ No 3. At that time, were your savings more than the amount you received under the Progress

Package? □ Yes □ No

Please turn over to page 2

36

4. Please choose the statements that best describe how you feel about the Progress Package (Please choose all that are applicable) 37

□ I will probably have to pay more taxes in the future because of the Progress Package. So I saved it for the future.

□ I spent it because I have already spent all my money. If I could borrow some money, I would have borrowed it and spent it.

□ I will probably have to pay more taxes in the future because of the Progress Package. But I do not worry about the future. I spent it while I could.

□ Other people may have to pay more taxes in the future because of the Progress Package. But not for me. My tax burden will be lower in the future because I will be earning less or spending less when that happens.

□ The future generations will probably have to pay more taxes because of the Progress Package. But not for me. So I do not worry about it and I spent it.

□ The future generations will probably have to pay more taxes because of the Progress Package. But not for me. But I am worried for my sons and daughters. So I saved it for them.

□ I do not know what my taxes will be in the future. But with so much uncertainty, I saved it for the rainy days.

□ I do not know what my taxes will be in the future. As a general rule, I just spend whatever I receive in cash or in check, like the Progress Package. But I try not to touch my savings.

□ None of the above. Please elaborate: 5. What did you spend on? (Please specify) 6. Did you spend it on things that you would not otherwise spend on had you not received

the progress package? □ Yes □ No 7. Do you agree with the following statement?

“If I had not received the Progress Package, but if I had instead received the same amount of money from my salary, I would have used the money in exactly the same way as I had used the Progress Package”

□ Strongly disagree □ Disagree □ Agree □ Strongly Agree □ Don’t know

Section C 1. Because of the Progress Package, taxes will probably be _____ in the future. □ lower □ unchanged □ higher □ Don’t know

2. Because of the Progress Package, government spending will probably be ____ in the

future. □ lower □ unchanged □ higher □ Don’t know

37 There are two versions. The only difference between the two versions of the questionnaires is the order in which different explanations appear in Section B Question 4 (to control for order effect): the order of explanations 2-4 and explanations 5-8 are switched, but Ricardian equivalence always appears first at the top of the list (so that if this were really the explanation, the respondents could not miss it).

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Appendix 2: Sample Characteristics vs. Population Characteristics

Table A1: Age Groups

Sample Population21-25 23.8% 8.5%26-30 24.0% 9.7%31-35 14.6% 11.6%36-40 8.9% 11.9%41-45 7.7% 12.7%46-50 7.7% 12.0%51-55 6.9% 10.0%56-60 3.2% 7.7%>60 3.2% 16.0%Total 100.0% 100.0%

Notes: The percentages are calculated as a percentage of adult population, i.e., those aged 21 and over. The population statistics refer to resident population, which includes both Singapore citizens and permanent residents. Unfortunately, the statistics for Singapore citizens are not reported separately in the data source.

Table A2: Highest Educational Attainment

Sample PopulationNo Qualification 3.8% 18.0%Primary 2.2% 22.9%Secondary 16.2% 22.5%Upper Secondary 14.1% 14.9%Polytechnic 21.2% 8.2%University 42.4% 13.5%

Notes: Upper Secondary includes (pre-university) junior colleges and vocational education; University includes university graduates and postgraduates. The population statistics for educational attainment are for Singapore citizens only and do not include permanent residents.

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Table A3: Monthly Income (S$)38

S$ Sample Population<1,000 14.8% 13.1%1,000-1,999 17.8% 26.4%2,000-2,999 29.2% 21.0%3,000-3,999 16.6% 13.5%4,000-4,999 10.7% 7.9%5,000-5,999 4.3% 5.2%6,000-6,999 2.8% 3.2%7,000-7,999 1.4% 2.1%8,000-8,999 0.4% 1.7%9,000-9,999 0.8% 1.0%>10,000 1.2% 4.9%

Notes: The population statistics refer to monthly income from work for resident working persons aged 15 years and over.

Table A4: Residence

Residential Type Sample PopulationHDB 1- & 2-Room 0.8% 4.4%HDB 3-Room 13.7% 20.7%HDB 4-Room 36.8% 32.5%HDB 5-Room/Executive 33.5% 26.9%Private Flats/Condo 9.3% 9.4%Private Houses 4.7% 5.5%Total 98.8% 99.4%

Notes: The population statistics refer to dwelling type for residential households (which include Singapore citizens and permanent residents). Unfortunately, the statistics for Singapore citizens are not reported separately in the data source. Sources of Population Statistics: General Household Survey 2005, Statistical Release 1: Socio-Demographic and Economic Characteristics, Department of Statistics, Ministry of Trade and Industry, Republic of Singapore. http://www.singstat.gov.sg/pubn/popn/ghsr1.html General Household Survey 2005, Statistical Release 2: Transport, Overseas Travel, Households and Housing Characteristics, Department of Statistics, Ministry of Trade and Industry, Republic of Singapore. http://www.singstat.gov.sg/pubn/popn/ghsr2.html

38 At the end of 2006, S$1 = US$0.65. The average exchange rate during 2006 was S$1=US$0.63.