Mistakes in Future Consumption, High MPCs Now

Chen Lian

No 29517, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a canonical intertemporal consumption model, future consumption mistakes (in response to saving changes) lead to higher current marginal propensities to consume (MPCs). These mistakes increase the value of changing current consumption relative to changing saving, as additional saving will not be spent optimally. Various behavioral biases can cause these mistakes, such as inattention, present bias, diagnostic expectations, and near-rationality (epsilon-mistakes). This result helps explain the empirical puzzle of high-liquidity consumers’ high MPCs. In my approach, predictions of sophistication (anticipation of future mistakes) can be derived independently of the underlying biases.

JEL-codes: D90 E21 E70 G40 G51 (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (2)

Published as Chen Lian, 2023. "Mistakes in Future Consumption, High MPCs Now," American Economic Review: Insights, vol 5(4), pages 563-581.

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