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Does money illusion matter in intertemporal decision making?

Tetsuo Yamamori, Kazuyuki Iwata and Akira Ogawa ()

Journal of Economic Behavior & Organization, 2018, vol. 145, issue C, 465-473

Abstract: To examine the degree to which price fluctuations affect how individuals approach an intertemporal decision-making problem, we conduct a laboratory experiment in which subjects spend their savings to purchase only one commodity over 20 periods. In the control treatment, the commodity price is constant across all periods. In the small (large) price-fluctuation treatment, the price rate of change is always 1% (20%). Regardless of the treatment, the commodity price and subjects’ savings change at the same rate over time. Therefore, the optimal amount of consumption is the same in all three treatments. Our main findings are twofold. First, the magnitude of misconsumption (i.e., the deviation from optimal consumption) is significantly high, with the large price-fluctuation treatment being the highest, followed by the small price-fluctuation treatment and then the control treatment. Second, regardless of the presence of price fluctuations, subjects exhibit underconsumption (oversaving) behavior, and price fluctuations strengthen this tendency.

Keywords: Intertemporal decision making; Money illusion; Price fluctuations; Economic experiment (search for similar items in EconPapers)
JEL-codes: C91 D91 E31 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (7)

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DOI: 10.1016/j.jebo.2017.11.019

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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