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Quick-Fixing: Near-Rationality in Consumption and Savings Behavior

Author

Listed:
  • Peter Andre
  • Joel P. Flynn
  • Georgios Nikolakoudis
  • Karthik Sastry

Abstract

When optimizing consumption-savings decisions is costly, people may instead rely on quick-fixes, simple policy functions that avoid these costs. We introduce a model of quick-fixing. To study it empirically, we field a novel survey that measures households' consumption policy functions in response to income shocks. Almost 70% of households follow one of four simple quick-fixes that fully consume or fully save out of small shocks, but they abruptly adjust their behavior for large shocks. This behavior accounts for almost half of the cross-sectional variance in marginal propensities to consume, but is poorly predicted by other demographic and economic information. In an incomplete-markets model calibrated to match our evidence, we find that quick-fixing is near-rational: the average opportunity cost of quick-fixing is only $17 per quarter. Yet, this small, empirically realistic deviation from the rational model significantly alters aggregate consumption responses to income shocks of varying sizes.

Suggested Citation

  • Peter Andre & Joel P. Flynn & Georgios Nikolakoudis & Karthik Sastry, 2025. "Quick-Fixing: Near-Rationality in Consumption and Savings Behavior," NBER Working Papers 33464, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33464
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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