Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks

50 Pages Posted: 21 Jul 2012

See all articles by Justine S. Hastings

Justine S. Hastings

Brown University; National Bureau of Economic Research (NBER)

Jesse M. Shapiro

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 2012

Abstract

We formulate a test of the fungibility of money based on parallel shifts in the prices of different quality grades of a commodity. We embed the test in a discrete-choice model of product quality choice and estimate the model using panel microdata on gasoline purchases. We find that when gasoline prices rise consumers substitute to lower octane gasoline, to an extent that cannot be explained by income effects. Across a wide range of specifications, we consistently reject the null hypothesis that households treat "gas money" as fungible with other income. We evaluate the quantitative performance of a set of psychological models of decision-making in explaining the patterns we observe. We also use our findings to shed light on extant stylized facts about the time-series properties of retail markups in gasoline markets.

Suggested Citation

Hastings, Justine and Shapiro, Jesse M., Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks (July 2012). NBER Working Paper No. w18248. Available at SSRN: https://ssrn.com/abstract=2114874

Justine Hastings (Contact Author)

Brown University ( email )

Box 1860
Providence, RI 02912
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jesse M. Shapiro

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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