On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods
78 Pages Posted: 25 Aug 2013 Last revised: 4 Sep 2013
Date Written: August 23, 2013
Abstract
We propose a new classification of consumption goods into nondurable goods, durable goods and a new class which we call “memorable" goods. A good is memorable if a consumer can draw current utility from its past consumption experience through memory. We propose a novel consumption-savings model in which a consumer has a well-defined preference ordering over both nondurable goods and memorable goods. Memorable goods consumption differs from nondurable goods consumption in that current memorable goods consumption may also impact future utility through the accumulation process of the stock of memory. In our model, households optimally choose a lumpy profile of memorable goods consumption even in a frictionless world. Using Consumer Expenditure Survey data, we then document levels and volatilities of different groups of consumption goods expenditures, as well as their expenditure patterns, and show that the expenditure patterns on memorable goods indeed differ significantly from those on nondurable and durable goods. Finally, we empirically evaluate our model's predictions with respect to the welfare cost of consumption fluctuations and conduct an excess-sensitivity test of the consumption response to predictable income changes. We find that (i) the welfare cost of household-level consumption fluctuations may be overstated by 1:7 percentage points (11:9% points as opposed to 13:6% points of permanent consumption) if memorable goods are not appropriately accounted for; (ii) the finding of excess sensitivity of consumption documented in important papers of the literature might be entirely due to the presence of memorable goods.
Keywords: Memorable Goods, Consumption Volatility, Welfare Cost
JEL Classification: D91, E21
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Relative Wage Movements and the Distribution of Consumption
By Orazio Attanasio and Stephen J. Davis
-
Consumption and Risk Sharing Over the Life Cycle
By Kjetil Storesletten, Chris Telmer, ...
-
Intertemporal Choice and Inequality
By Angus Deaton and Christina Paxon
-
Partial Insurance, Information, and Consumption Dynamics
By Richard W. Blundell, Luigi Pistaferri, ...
-
Does Income Inequality Lead to Consumption Inequality? Evidence and Theory
By Dirk Krueger and Fabrizio Perri
-
Does Income Inequality Lead to Consumption Inequality? Evidence and Theory
By Dirk Krueger and Fabrizio Perri
-
Does Income Inequality Lead to Consumption Inequality? Evidence and Theory
By Dirk Krueger and Fabrizio Perri
-
Income Variance Dynamics and Heterogeneity
By Costas Meghir and Luigi Pistaferri
-
Rising Inequality? Changes in the Distribution of Income and Consumption in the 1980s
By David M. Cutler and Lawrence F. Katz
-
The Macroeconomic Implications of Rising Wage Inequality in the United States
By Jonathan Heathcote, Kjetil Storesletten, ...