Quick-Fixing: Near-Rationality in Consumption and Savings Behavior

Abstract

When changing consumption-savings plans is costly, people may rely on quick-fixes: simple rules that avoid these costs. We field a novel survey to elicit the distribution of households’ consumption policy functions out of income shocks. Almost 70% of households follow one of four quick-fixes: they fully consume or save small shocks, but abruptly adjust their behavior for large shocks, and thereafter behave similarly. In a calibrated incomplete-markets model, quick-fixing is near-rational: the average opportunity cost of quick-fixing is only $16 per quarter. Yet, this empirically realistic deviation from benchmark models significantly alters aggregate consumption responses to income shocks.

JEL Classification: E21, E71