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

Peter Andre, Joel Flynn, Georgios Nikolakoudis and Karthik Sastry

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

Abstract: When changing consumption-savings plans is costly, people may rely on quick-fixes: simple rules that avoid these costs. We field a novel survey to elicit the distribution of households’ consumption policy functions out of income shocks. Almost 70% of households follow one of four quick-fixes: they fully consume or save small shocks, but abruptly adjust their behavior for large shocks, and thereafter behave similarly. In a calibrated incomplete-markets model, quick-fixing is near-rational: the average opportunity cost of quick-fixing is only $16 per quarter. Yet, this empirically realistic deviation from benchmark models significantly alters aggregate consumption responses to income shocks.

JEL-codes: E21 E62 E70 G51 (search for similar items in EconPapers)
Date: 2025-02
Note: EFG ME
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Citations: View citations in EconPapers (1)

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Working Paper: Quick-fixing: Near-rationality in consumption and savings behavior (2024)
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