This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. June 2009
  5. Reference-Dependent Consumption Plans

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Reference-Dependent Consumption Plans

  • Botond Kőszegi
  • Matthew Rabin
American Economic Review
vol. 99, no. 3, June 2009
(pp. 909–36)
Download Full Text PDF

Abstract

We develop a rational dynamic model in which people are loss averse over changes in beliefs about present and future consumption. Because changes in wealth are news about future consumption, preferences over money are reference-dependent. If news resonates more when about imminent consumption than when about future consumption, a decision maker might (to generate pleasant surprises) overconsume early relative to the optimal committed plan, increase immediate consumption following surprise wealth increases, and delay decreasing consumption following surprise losses. Since higher wealth mitigates the effect of bad news, people exhibit an unambiguous first-order precautionary-savings motive. (JEL D14, D81, D83, D91)

Citation

Kőszegi, Botond, and Matthew Rabin. 2009. "Reference-Dependent Consumption Plans." American Economic Review, 99 (3): 909–36. DOI: 10.1257/aer.99.3.909

Additional Materials

JEL Classification

  • D14 Personal Finance
  • D81 Criteria for Decision-Making under Risk and Uncertainty
  • D83 Search; Learning; Information and Knowledge; Communication; Belief
  • D15 Intertemporal Consumer Choice; Life Cycle Models and Saving