Explaining Consumption Excess Sensitivity with Near-Rationality: Evidence from Large Predetermined Payments

Lorenz Kueng

No 21772, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using new transaction data I find that consumption is excessively sensitive to salient, predetermined, large and regular payments from the Alaska Permanent Fund, with a large average marginal propensity to consume (MPC) of 30% for nondurables and services. This excess sensitivity is very heterogeneous: The deviation from the standard consumption model is largest for households for whom the loss from failing to smooth consumption is smallest in terms of equivalent variation. The estimated MPCs are monotonically decreasing in the loss and increasing in income for households with sufficient liquidity. I show that the economically and statistically significant excess sensitivity is consistent with households following near-rational alternative plans. For macroeconomic policies, such as an economic stimulus program, these near-rational alternatives might represent the more relevant behavior than the standard consumption model.

JEL-codes: D12 D14 D91 E21 H31 (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-mac and nep-pbe
Note: AP EFG LS ME PE
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Citations: View citations in EconPapers (23)

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