Mental Accounting and the Marginal Propensity to Consume

René Bernard

VfS Annual Conference 2022 (Basel): Big Data in Economics from Verein für Socialpolitik / German Economic Association

Abstract: This paper studies how consumers respond to unexpected, transitory income shocks and why. In a randomized control trial, I elicit marginal propensities to consume (MPC) out of different hypothetical income shock scenarios, varying the payment mode, the shock size, and the source of income. The results show respondents exhibit a higher MPC when exposed to a windfall paid out in cash or without any specification of the payment mode, respectively, compared to a windfall deposited in an instant-access savings account, suggesting consumers violate fungibility. Further, the MPC falls with the shock size, whereas it does not vary with the source of income. Using causal machine learningmethods to explore treatment heterogeneity, I find that low liquidity, self-control problems, and a lack of cognitive sophistication contribute to MPC heterogeneity. The results are broadly in line with mental accounting theory.

Keywords: Randomized control trial; marginal propensity to consume; fiscal policy; mental accounting; causal forest (search for similar items in EconPapers)
JEL-codes: C90 D12 D14 D15 D91 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cmp and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc22:264186

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