Explaining Consumption Excess Sensitivity with Near-Rationality: Evidence from Large Predetermined Payments

Lorenz Kueng

NBER Working Paper No. 21772
Issued in December 2015, Revised in August 2016
NBER Program(s):AP, EFG, LS, ME, PE

Using new transaction data I find that consumption is excessively sensitive to salient, predetermined, large and regular payments from the Alaska Permanent Fund, with a large average marginal propensity to consume (MPC) of 30% for nondurables and services. This excess sensitivity is very heterogeneous: The deviation from the standard consumption model is largest for households for whom the loss from failing to smooth consumption is smallest in terms of equivalent variation. The estimated MPCs are monotonically decreasing in the loss and increasing in income for households with sufficient liquidity. I show that the economically and statistically significant excess sensitivity is consistent with households following near-rational alternative plans. For macroeconomic policies, such as an economic stimulus program, these near-rational alternatives might represent the more relevant behavior than the standard consumption model.

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Document Object Identifier (DOI): 10.3386/w21772

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