Quick-Fixing: Near-Rationality in Consumption and Savings Behavior

Peter Andre, Joel P. Flynn, Georgios Nikolakoudis and Karthik Sastry

No 33464, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: When optimizing consumption-savings decisions is costly, people may instead rely on quick-fixes, simple policy functions that avoid these costs. We introduce a model of quick-fixing. To study it empirically, we field a novel survey that measures households' consumption policy functions in response to income shocks. Almost 70% of households follow one of four simple quick-fixes that fully consume or fully save out of small shocks, but they abruptly adjust their behavior for large shocks. This behavior accounts for almost half of the cross-sectional variance in marginal propensities to consume, but is poorly predicted by other demographic and economic information. In an incomplete-markets model calibrated to match our evidence, we find that quick-fixing is near-rational: the average opportunity cost of quick-fixing is only $17 per quarter. Yet, this small, empirically realistic deviation from the rational model significantly alters aggregate consumption responses to income shocks of varying sizes.

JEL-codes: E21 E62 E70 G51 (search for similar items in EconPapers)
Date: 2025-02
Note: EFG ME
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