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Memory Utility

Listed author(s):
  • Itzhak Gilboa

    ()

    (University of Tel Aviv)

  • Andrew Postlewaite

    ()

    (Department of Economics, University of Pennsylvania)

  • Larry Samuelson

    ()

    (Yale University and HEC Paris)

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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File URL: http://economics.sas.upenn.edu/system/files/15-005.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 15-005.

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Length: 53 pages
Date of creation: 21 Jan 2015
Handle: RePEc:pen:papers:15-005
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  1. R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," Review of Economic Studies, Oxford University Press, vol. 23(3), pages 165-180.
  2. Sundaram,Rangarajan K., 1996. "A First Course in Optimization Theory," Cambridge Books, Cambridge University Press, number 9780521497701, December.
  3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  4. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2006. "Are Americans Saving "Optimally" for Retirement?," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 607-643, August.
  5. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  6. Sundaram,Rangarajan K., 1996. "A First Course in Optimization Theory," Cambridge Books, Cambridge University Press, number 9780521497190, December.
  7. Rong Hai & Dirk Krueger & Andrew Postlewaite, 2014. "On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods, Second Version," PIER Working Paper Archive 15-004, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 14 Jan 2015.
  8. Gary S. Becker & Kevin M. Murphy, 1986. "A Theory of Rational Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State 41, Chicago - Center for Study of Economy and State.
  9. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
  10. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
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