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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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    1. Jonathan A. Parker, 2017. "Why Don't Households Smooth Consumption? Evidence from a $25 Million Experiment," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 153-183, October.
    2. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(4), pages 1661-1710.
    3. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    4. Jonathan A. Parker & Jake Schild & Laura Erhard & David S. Johnson, 2022. "Economic Impact Payments and Household Spending during the Pandemic," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 53(2 (Fall)), pages 81-156.
    5. Ganong, Peter & Noel, Pascal & Vavra, Joseph, 2020. "US unemployment insurance replacement rates during the pandemic," Journal of Public Economics, Elsevier, vol. 191(C).
    6. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    7. 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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    More about this item

    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

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