POLICY WORK

This paper studies economies in which households differ in saving motives due to heterogeneity in preferences or income risk. First, it shows that household self-insurance operates along two margins: a liquidity margin determined by current savings and an intertemporal margin governed by long-run desired savings (target wealth), reflecting underlying saving motives. Second, it shows that a stronger intertemporal margin implies lower marginal propensities to consume (MPCs) in the Euler region, independently of current resources. Third, because the two margins typically co-move, the analysis restricts the covariance between the determinants of saving motives (e.g., income risk) and households’ accumulation capacity (e.g., income levels) to separate their effects, and establishes a constructive existence result: there exist equilibria under standard preferences and rational expectations in which households are wealthier because they have higher income and yet exhibit higher MPCs because they have weaker saving motives. Fourth, the paper formalizes the distributional implications: cross-sectional MPC–wealth patterns can be non-monotone, reflecting sorting across heterogeneous types rather than liquidity alone. Empirical and quantitative applications to income-risk heterogeneity support the mechanism and highlight a complementary perspective in which affluent households shape macroeconomic dynamics beyond standard borrowing-constraint channels.