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Fungibility and Consumer Choice: Evidence from Commodity Price Shocks

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  • 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 compare the empirical fit of three psychological models of decision making. A simple model of category budgeting fits the data well, with models of loss aversion and salience both capturing important features of the time series. JEL Codes: D12, L15, Q41, D03. Copyright 2013, Oxford University Press.

Suggested Citation

  • Jesse M. Shapiro, 2013. "Fungibility and Consumer Choice: Evidence from Commodity Price Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 128(4), pages 1449-1498.
  • Handle: RePEc:oup:qjecon:v:128:y:2013:i:4:p:1449-1498
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    File URL: http://hdl.handle.net/10.1093/qje/qjt018
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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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