Temptation and Commitment: A Model of Hand-to-Mouth Behavior

Orazio Attanasio, Agnes Kovacs and Patrick Moran

No 27944, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents a model of consumption behavior that explains the presence of ‘wealthy hand-to-mouth’ consumers using a mechanism that differs from those analyzed previously. We show that a two-asset model with temptation preferences generates a demand for commitment and thus illiquidity, leading to hand-to-mouth behavior even when liquid assets deliver higher returns than illiquid assets. This preference for illiquidity has important implications for consumption behaviour and for fiscal stimulus policies. Our model matches the recent empirical evidence that MPCs remain high even for large income shocks, suggesting a larger response to targeted fiscal stimulus than previously believed.

JEL-codes: D11 D14 D91 E21 R21 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-mac
Note: EFG
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Citations: View citations in EconPapers (5)

Published as Orazio Attanasio & Agnes Kovacs & Patrick Moran, 2024. "Temptation and Commitment: a Model of Hand-to-Mouth Behavior," Journal of the European Economic Association, vol 22(4), pages 2025-2073.

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