Mistakes in Future Consumption, High MPCs Now
American Economic Review: Insights
vol. 5,
no. 4, December 2023
(pp. 563-81)
Abstract
In a canonical intertemporal consumption model, future consumption mistakes (in response to saving changes) lead to higher current marginal propensities to consume (MPCs). These mistakes increase the value of changing current consumption relative to changing saving, as additional saving will not be spent optimally. Various behavioral biases can cause these mistakes, such as inattention, present bias, diagnostic expectations, and near-rationality (epsilon-mistakes). This result helps explain the empirical puzzle of high-liquidity consumers' high MPCs. In my approach, predictions of sophistication (anticipation of future mistakes) can be derived independently of the underlying biases.Citation
Lian, Chen. 2023. "Mistakes in Future Consumption, High MPCs Now." American Economic Review: Insights, 5 (4): 563-81. DOI: 10.1257/aeri.20220452Additional Materials
JEL Classification
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- E21 Macroeconomics: Consumption; Saving; Wealth