Durables, Non-Durables, and a Structural Test of Fungibility

34 Pages Posted: 29 Oct 2019

See all articles by Alan Montgomery

Alan Montgomery

Carnegie Mellon University - Tepper School of Business

Christopher Y. Olivola

Tepper School of Business, Carnegie Mellon University

Nick Pretnar

Carnegie Mellon University - David A. Tepper School of Business

Date Written: April 19, 2018

Abstract

In his 1999 summary of all things mental accounting (see Thaler [21]), Richard Thaler describes one of the primary components of mental accounting as the budgeting of specific utility-providing activities which can depend, but does not have to, on the resources used to fund those activities. The analysis presented in this paper focusses specifically on household expenditure of durable and non-durable goods and the liquidity sources used to fund these different expenditures. Specifically, we exploit a linked dataset of credit and debit card users to examine consumer purchasing patterns of durable and non-durable consumption commodities under both methods of payment. Our findings suggest that on average durable purchases are more sensitive to increases in available credit than non-durable purchases, and most consumers are more likely to increase total consumption due to increases in available credit than increases in available checking account balances. We empirically show that the standard neo-classical consumption/savings model, the equilibrium conditions of which implicitly assume that the household’s available resources (liquidity and investments) are perfectly fungible, fails to rationalize our data for the median/modal consumer in our sample. However, our results are rich because we also show that the behavioral distribution of consumers includes both households which treat liquidity as fungible and those that do not. Given the heterogeneity we find, future work should test whether these results would matter on aggregate.

Keywords: mental accounting, fungibility, durable, non-durable, consumption

JEL Classification: D01, D11, D90

Suggested Citation

Montgomery, Alan and Olivola, Christopher Y. and Pretnar, Nicholas, Durables, Non-Durables, and a Structural Test of Fungibility (April 19, 2018). Available at SSRN: https://ssrn.com/abstract=3472159 or http://dx.doi.org/10.2139/ssrn.3472159

Alan Montgomery

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Christopher Y. Olivola

Tepper School of Business, Carnegie Mellon University ( email )

5000 Forbes Ave.
Pittsburgh, PA 15213
United States

Nicholas Pretnar (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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