Scarred Consumption

96 Pages Posted: 22 Oct 2019

See all articles by Ulrike Malmendier

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Leslie Sheng Shen

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 2019-10-09

Abstract

We show that prior lifetime experiences can "scar" consumers. Consumers who have lived through times of high unemployment exhibit persistent pessimism about their future financial situation and spend significantly less, controlling for the standard life-cycle consumption factors, even though their actual future income is uncorrelated with past experiences. Due to their experience-induced frugality, scarred consumers build up more wealth. We use a stochastic lifecycle model to show that the negative relationship between past experiences and consumption cannot be generated by financial constraints, income scarring, and unemployment scarring, but is consistent with experience-based learning.

Keywords: Household consumption, Experience effects, Expectation, Lifecycle model

JEL Classification: D12, D15, D83, D91, G51

Suggested Citation

Malmendier, Ulrike and Shen, Leslie Sheng, Scarred Consumption (2019-10-09). FRB International Finance Discussion Paper No. 1259. Available at SSRN: https://ssrn.com/abstract=3473070 or http://dx.doi.org/10.17016/IFDP.2019.1259

Ulrike Malmendier (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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HOME PAGE: http://www.econ.berkeley.edu/~ulrike/

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER)

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Leslie Sheng Shen

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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