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Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks

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  • Justine Hastings
  • Jesse M. Shapiro

Abstract

We formulate a test of the fungibility of money based on parallel shifts in the prices of different quality grades of a commodity. We embed the test in a discrete-choice model of product quality choice and estimate the model using panel microdata on gasoline purchases. We find that when gasoline prices rise consumers substitute to lower octane gasoline, to an extent that cannot be explained by income effects. Across a wide range of specifications, we consistently reject the null hypothesis that households treat “gas money” as fungible with other income. We evaluate the quantitative performance of a set of psychological models of decision-making in explaining the patterns we observe. We also use our findings to shed light on extant stylized facts about the time-series properties of retail markups in gasoline markets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18248.

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Date of creation: Jul 2012
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Handle: RePEc:nbr:nberwo:18248

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