Explaining Consumption Excess Sensitivity with Near-Rationality: Evidence from Large Predetermined Payments

Lorenz Kueng

Research output: Working paper

Abstract

Using new transaction data I show that consumption is excessively sensitive to large, predetermined, regular, and salient payments from the Alaska Permanent Fund, with a large average marginal propensity to consume (MPC) of 30% for nondurables and services and 70% for total expenditures. This deviation from the standard inter-temporal consumption model is concentrated among households for whom the loss from failing to smooth consumption is small in terms of equivalent variation. In particular, the MPC is increasing in household income but decreasing in the size of the loss. As a result, statistically significant excess sensitivity in response to these large payments is consistent with households following near-rational alternative consumption plans. For macroeconomic policies, such as an economic stimulus program, these near-rational alternatives might be the more relevant behavior than the standard consumption model.
Original languageEnglish (US)
PublisherNational Bureau of Economic Research (NBER)
Number of pages36
DOIs
StatePublished - Nov 2015

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