A Model of Consumption with Mental Accounting and Heterogeneous Agents

Jaime Gimeno-Ribes

No 1550, Working Papers from Barcelona School of Economics

Abstract: This paper studies how mental accounting of income and wealth affects consumption decisions in a heterogeneous agent environment with incomplete markets, idiosyncratic risk, and asset illiquidity. Mental accounting is formalized using elements from reference-dependence with loss aversion, and it offers a unified explanation of empirical facts about marginal propensities to consume (MPC) and the household distribution that elude standard models: the existence of poor, wealthy, and liquid hand-to-mouth; a spender-saver MPC distribution; realistic levels of aggregate MPC, wealth, return spread, and consumption; differential MPCs from dividends and capital gains; non- Ricardian intertemporal MPCs; and asymmetric MPCs with respect to different attributes.

Keywords: Heterogeneous agents; mental accounting; marginal propensities to consume; illiquid assets (search for similar items in EconPapers)
JEL-codes: D11 D14 D15 D31 D90 E21 E70 (search for similar items in EconPapers)
Date: 2026-01
New Economics Papers: this item is included in nep-dge
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