Consumption Adjustment Under Negative Income Shocks: A Constrained Optimisation and Experimental Framework

Bento Maria

No 2026/0432, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: This paper proposes a constrained optimisation and experimental framework to study how individuals adjust consumption after negative disposable income shocks. Standard consumer theory predicts that households should re-optimise consumption when income changes, but behavioural frictions such as habits, inertia, limited attention, and resistance to downward adjustment may prevent individuals from moving immediately towards a new optimal allocation. The framework considers expenditure allocation across heterogeneous goods subject to a budget constraint and category-specific bounds. A negative income shock generates a new benchmark allocation, which is compared with the allocation chosen by participants in a proposed experimental setting. The design includes three stages: a baseline allocation, a spontaneous post-shock allocation, and a guided post-shock allocation. Spending guidance is introduced as a simplified decision aid derived from the benchmark optimisation model. The main outcome is the distance between observed allocations and the modelimplied benchmark allocation, together with category-specific expenditure responses. The paper therefore focuses not only on whether consumption falls after an income shock, but also on how expenditure is redistributed across essential and discretionary categories. By linking constrained optimisation, heterogeneous goods, and behavioural frictions, the paper contributes to the analysis of consumption adjustment under shocks and provides a basis for future experimental and macroeconomic extensions.

Keywords: consumption adjustment; income shocks; household consumption; experimental economics; behavioural frictions; optimal consumption. (search for similar items in EconPapers)
JEL-codes: C91 D12 D91 E21 (search for similar items in EconPapers)
Date: 2026-09
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