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On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods, Second Version

Author

Listed:
  • Rong Hai

    () (Department of Economics, University of Chicago)

  • Andrew Postlewaite

    () (Department of Economics, University of Pennsylvania)

  • Dirk Krueger

    () (Department of Economics, University of Pennsylvania)

Abstract

We propose a new category of consumption goods, memorable goods, that generate a flow of utility after consumption. We analyze an otherwise standard consumption model that distinguishes memorable goods from other nondurable goods. Consumers optimally choose lumpy consumption of memorable goods. We then empirically document significant differences between levels and volatilities of memorable and other nondurable good expenditures. In two applications we find that the welfare cost of consumption fluctuations driven by income shocks are significantly overstated if memorable goods are not accounted for and that estimates of excess sensitivity of consumption might be entirely due to memorable goods.

Suggested Citation

  • Rong Hai & Andrew Postlewaite & Dirk Krueger, 2013. "On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods, Second Version," PIER Working Paper Archive 14-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 15 Apr 2014.
  • Handle: RePEc:pen:papers:14-012
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    References listed on IDEAS

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    Cited by:

    1. Itzhak Gilboa & Andrew Postlewaite & Larry Samuelson, 2015. "Memory Utility," PIER Working Paper Archive 15-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    2. repec:eee:dyncon:v:88:y:2018:i:c:p:21-30 is not listed on IDEAS
    3. Gilboa, Itzhak & Postlewaite, Andrew & Samuelson, Larry, 2016. "Memorable consumption," Journal of Economic Theory, Elsevier, vol. 165(C), pages 414-455.

    More about this item

    Keywords

    Memorable Goods; Consumption Volatility; Welfare Cost;

    JEL classification:

    • 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

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