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Mental Accounts and Consumption Sensitivity Across the Distribution of Liquid Assets

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  • James Graham
  • Robert A McDowall

Abstract

We study consumption spending responses to predictable income using household-level data from a U.S. financial institution. Even for households with large liquid asset balances, we find no spending in anticipation of income receipt, substantial spending following receipt, and significant front-loading with respect to date of receipt. To rationalize these findings, we develop a tractable model of mental accounts where consumption choices are partitioned across current income and current assets. Our model reproduces the timing, magnitude, and cross-section of consumption responses observed in the data. Finally, we use the model to study the effectiveness of targeted and untargeted fiscal stimulus policies.

Suggested Citation

  • James Graham & Robert A McDowall, 2024. "Mental Accounts and Consumption Sensitivity Across the Distribution of Liquid Assets," Working Papers 2024-07, University of Sydney, School of Economics.
    • Handle: RePEc:syd:wpaper:2024-07
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    References listed on IDEAS

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    6. Justine Hastings & Jesse M. Shapiro, 2012. "Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks," NBER Working Papers 18248, National Bureau of Economic Research, Inc.
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