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Fungibility, Labels and Consumption

  • Johannes Abeler

    ()

    (University of Nottingham)

  • Felix Marklein

    (University of Bonn)

Fungibility of money is a central assumption in the theory of consumer choice: any unit of money is substitutable for another. This implies that the composition of income or wealth is irrelevant for consumption. We find in a field experiment that even in a simple, incentivized setup many subjects do not treat money as fungible. When a label is attached to a part of their budget, subjects change consumption according to the label. A controlled laboratory experiment confirms this result and further shows that subjects with lower cognitive abilities are more likely to violate fungibility. The findings lend support to behavioral models of narrow bracketing and mental accounting. One implication of our result is that in-kind benefits distort consumption more strongly than usually assumed.

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Paper provided by The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham in its series Discussion Papers with number 2010-13.

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Date of creation: Jul 2010
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Handle: RePEc:not:notcdx:2010-13
Contact details of provider: Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
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Web page: http://www.nottingham.ac.uk/economics/cedex/

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