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On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods

Author

Listed:
  • Rong Hai

    (Department of Economics, University of Miami)

  • Dirk Krueger

    (Department of Economics, University of Pennsylvania)

  • Andrew Postlewaite

    (Department of Economics, University of Pennsylvania)

Abstract

We propose a new category of consumption goods, memorable goods, that generate a util-ity flow even after physical consumption. Empirically, memorable goods expenditures exhibit frequent zero monthly purchases and lumpy expenditure spikes. Memorable goods expendi-tures are 20% the size of nondurable expenditures, but twice as volatile. We then develop a consumption-savings model with borrowing constraints and income risk that formalizes the notion of memorable goods and distinguishes them from other nondurable goods. We show that consumers optimally choose lumpy consumption of memorable goods. We then measure the welfare cost of consumption fluctuations using our calibrated model and empirically eval-uate our calibrated model’s predictions for the consumption response to predictable income changes. We find that the welfare cost of household-level consumption fluctuations induced by income shocks fall from 20.4 to 12.3 percentage points if memorable goods are accounted for, and that empirical estimates of excess sensitivity of consumption may significantly be driven by memorable goods expenditures.

Suggested Citation

  • Rong Hai & Dirk Krueger & Andrew Postlewaite, 2014. "On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods," PIER Working Paper Archive 20-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 26 Jun 2020.
  • Handle: RePEc:pen:papers:20-025
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    References listed on IDEAS

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    1. Memorable goods
      by Economic Logician in Economic Logic on 2013-10-15 19:45:00

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    2. Stan Miles & Peter Smoczynski, 2016. "Optimal Intertemporal Consumption and Involuntary Memories of Consumption," Australian Economic Papers, Wiley Blackwell, vol. 55(3), pages 251-273, September.
    3. Stéphane Lemarié & Cecilia Vergari, 2021. "Monopoly strategy with purchase dependent preferences and endogenous preference change," Discussion Papers 2021/271, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    4. Runze Yuan & Xi Xi & Zhentao Liu, 2023. "Random “Decision and Experienced Utility”, Adaptive “Consumer Memory and Choice”: The Impact of Mind Fluctuations and Cognitive Biases on Consumption and Classification," Mathematics, MDPI, vol. 11(6), pages 1-26, March.
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    7. Keshav Dogra & Olga Gorbachev, 2016. "Consumption Volatility, Liquidity Constraints and Household Welfare," Economic Journal, Royal Economic Society, vol. 126(597), pages 2012-2037, November.
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    9. Barros, Fernando & Gomes, Fábio Augusto R. & Luduvice, André Victor D., 2024. "The welfare costs of business cycles unveiled: Measuring the extent of stabilization policies," European Economic Review, Elsevier, vol. 169(C).
    10. Barros, Fernando & Couto, Gabriel T. & Gomes, Fábio A.R., 2023. "On the welfare costs of business cycles: Beyond nondurable goods," Journal of Macroeconomics, Elsevier, vol. 78(C).

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    More about this item

    Keywords

    Memorable Goods; Consumption Volatility; Welfare Cost of Income Risk;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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