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Money Flexibility And Optimal Consumption-Leisure Choice Under Price Dispersion

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  • Sergey MALAKHOV

    ()
    (Université Pierre-Mendès-France, Grenoble, France)

Abstract

The synthesis of G.Sigler's rule of the optimal search with the classical individual labor supply model can incorporate the satisficing decision procedure in the neoclassical framework. Many psychological anomalies and puzzles like the paradox of little pre-purchase search for big-ticket items and the effect of sunk costs sensitivity get the purely economic rationale. This synthesis also enlarges the understanding of the phenomenon of money flexibility under price dispersion. The specific constraints of the search model establish the correspondence between elasticity of the marginal utility of labor income with regard to price dispersion, wage rates, and the propensity to search. The money flexibility under price dispersion discovers specific features of Veblen effect. The marginal utility of labor income becomes negative, when the smart shopping of luxuries results in price reductions, which are greater than the wage rate. The marginal utility of luxuries also becomes negative. And the total consumption-leisure utility is increasing only due to the increase in leisure time. The paper argues that the same mechanism underlies the phenomenon of money illusion due to the relatively excess money balances.

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Bibliographic Info

Article provided by ASERS Publishing in its journal Theoretical and Practical Research in Economic Fields.

Volume (Year): IV (2013)
Issue (Month): 1 (July)
Pages: 77-88

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Handle: RePEc:srs:tpref1:4:v:4:y:2013:i:1:p:77-88

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Related research

Keywords: money flexibility; Veblen effect; money illusion price dispersion;

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References

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  1. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  2. Malakhov, Sergey, 2012. "Veblen effect, search for status goods, and negative utility of conspicuous leisure," MPRA Paper 40809, University Library of Munich, Germany.
  3. Mark Aguiar & Erik Hurst, 2006. "Measuring trends in leisure: the allocation of time over five decades," Working Papers 06-2, Federal Reserve Bank of Boston.
  4. Diamond, Peter, 1987. "Consumer Differences and Prices in a Search Model," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 429-36, May.
  5. Malakhov, Sergey, 2012. "Satisficing decision procedure and optimal consumption-leisure choice," MPRA Paper 38964, University Library of Munich, Germany.
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Cited by:
  1. Malakhov, Sergey, 2014. "Sunk costs of consumer search: economic rationality of satisficing decision," MPRA Paper 53493, University Library of Munich, Germany.
  2. Malakhov, Sergey, 2014. "Money flexibility, price elasticity, and elasticity of marginal utility of consumption," MPRA Paper 55928, University Library of Munich, Germany.
  3. Malakhov, Sergey, 2013. "Эффект Веблена, Предельная Полезность Денег И Денежная Иллюзия
    [Veblen effect, marginal utility of money, and money illusion]
    ," MPRA Paper 51014, University Library of Munich, Germany.
  4. Malakhov, Sergey, 2014. "Slutsky equation and negative elasticity of labor supply: behavioral bias or optimal consumption-leisure choice?," MPRA Paper 53871, University Library of Munich, Germany.

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