Memory Utility
People often consume non-durable goods in a way that seems inconsistent with preferences for smoothing consumption over time. We suggest that such patterns of consumption can be better explained if one takes into account the memories that consumption generates. A memorable good, such as a honeymoon or a vacation, is a good whose mental consumption outlives its physical consumption. We consider a model in which a consumer enjoys physical consumption as well as memories. Memories are generated only by some goods, and only when their consumption exceeds customary levels by a sufficient margin. We offer axiomatic foundations for the structure of the utility function and study optimal consumption in a dynamic model. The model shows how rational consumers, taking into account their future memories, would make optimal choices that rationalize lumpy patterns of consumption.
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| Length: | 53 pages |
| Date of creation: | 21 Jan 2015 |
| Handle: | RePEc:pen:papers:15-005 |
| Contact details of provider: | Postal: 3718 Locust Walk, Philadelphia, PA 19104 Phone: 215-898-9992 Fax: 215-573-2378 Web page: http://economics.sas.upenn.edu/pier Email: More information through EDIRC
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