On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods

Rong Hai, Dirk Krueger and Andrew Postlewaite

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We propose a new category of consumption goods, memorable goods, that generate a util-ity flow even after physical consumption. Empirically, memorable goods expenditures exhibit frequent zero monthly purchases and lumpy expenditure spikes. Memorable goods expendi-tures are 20% the size of nondurable expenditures, but twice as volatile. We then develop a consumption-savings model with borrowing constraints and income risk that formalizes the notion of memorable goods and distinguishes them from other nondurable goods. We show that consumers optimally choose lumpy consumption of memorable goods. We then measure the welfare cost of consumption fluctuations using our calibrated model and empirically eval-uate our calibrated model’s predictions for the consumption response to predictable income changes. We find that the welfare cost of household-level consumption fluctuations induced by income shocks fall from 20.4 to 12.3 percentage points if memorable goods are accounted for, and that empirical estimates of excess sensitivity of consumption may significantly be driven by memorable goods expenditures.

Keywords: Memorable Goods; Consumption Volatility; Welfare Cost of Income Risk (search for similar items in EconPapers)
JEL-codes: D91 E21 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2014-04-15, Revised 2020-06-26
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: On the welfare cost of consumption fluctuations in the presence of memorable goods (2020)
Working Paper: On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods (2013)
Working Paper: On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods (2013)
Working Paper: On the Welfare Cost of Consumption Fluctuationsin the Presence of Memorable Goods (2013)
Working Paper: On the welfare cost of consumption fluctuations in the presence of memorable goods (2013)
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