Memory Utility

Itzhak Gilboa, Andrew Postlewaite and Larry Samuelson ()
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Larry Samuelson: Yale University and HEC Paris

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: People often consume non-durable goods in a way that seems inconsistent with preferences for smoothing consumption over time. We suggest that such patterns of consumption can be better explained if one takes into account the memories that consumption generates. A memorable good, such as a honeymoon or a vacation, is a good whose mental consumption outlives its physical consumption. We consider a model in which a consumer enjoys physical consumption as well as memories. Memories are generated only by some goods, and only when their consumption exceeds customary levels by a sufficient margin. We offer axiomatic foundations for the structure of the utility function and study optimal consumption in a dynamic model. The model shows how rational consumers, taking into account their future memories, would make optimal choices that rationalize lumpy patterns of consumption.

Keywords: Memorable goods; memory utility; consumption smoothing (search for similar items in EconPapers)
JEL-codes: D91 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2015-01-21
New Economics Papers: this item is included in nep-mic and nep-upt
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