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Temptation and Commitment: A Model of Hand-to-Mouth Behavior

Author

Listed:
  • Orazio Attanasio
  • Agnes Kovacs
  • Patrick Moran

Abstract

This paper presents a model of consumption behavior that explains the presence of ‘wealthy hand-to-mouth’ consumers using a mechanism that differs from those analyzed previously. We show that a two-asset model with temptation preferences generates a demand for commitment and thus illiquidity, leading to hand-to-mouth behavior even when liquid assets deliver higher returns than illiquid assets. This preference for illiquidity has important implications for consumption behaviour and for fiscal stimulus policies. Our model matches the recent empirical evidence that MPCs remain high even for large income shocks, suggesting a larger response to targeted fiscal stimulus than previously believed.

Suggested Citation

  • Orazio Attanasio & Agnes Kovacs & Patrick Moran, 2020. "Temptation and Commitment: A Model of Hand-to-Mouth Behavior," NBER Working Papers 27944, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27944
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    Cited by:

    1. Giovanni L. Violante & Greg Kaplan, 2022. "The Marginal Propensity to Consume in Heterogeneous Agent Models," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 747-775, August.
    2. Surico, Paolo & Andreolli, Michele, 2021. "Less is More: Consumer Spending and the Size of Economic Stimulus Payments," CEPR Discussion Papers 15918, C.E.P.R. Discussion Papers.
    3. Michel Alexandre & Gilberto Tadeu Lima & Luca Riccetti & Alberto Russo, 2023. "The financial network channel of monetary policy transmission: an agent-based model," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(3), pages 533-571, July.
    4. Ben Moll, 2020. "The Research Agenda: Ben Moll on the Rich Interactions between Inequality and the Macroeconomy," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 21(2), November.

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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