On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods

66 Pages Posted: 1 Jul 2020

See all articles by Rong Hai

Rong Hai

University of Miami - School of Business Administration - Department of Economics

Dirk Krueger

University of Pennsylvania; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Goethe University Frankfurt; Netspar

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Date Written: June 26, 2020

Abstract

We propose a new category of consumption goods, memorable goods, that generate a utility flow even after physical consumption. Empirically, memorable goods expenditures exhibit frequent zero monthly purchases and lumpy expenditure spikes. Memorable goods expenditures are 20% the size of nondurable expenditures, but twice as volatile. We then develop a consumption-savings model with borrowing constraints and income risk that formalizes the notion of memorable goods and distinguishes them from other nondurable goods. We show that consumers optimally choose lumpy consumption of memorable goods. We then measure the welfare cost of consumption fluctuations using our calibrated model and empirically evaluate our calibrated model’s predictions for the consumption response to predictable income changes. We find that the welfare cost of household-level consumption fluctuations induced by income shocks fall from 20.4 to 12.3 percentage points if memorable goods are accounted for, and that empirical estimates of excess sensitivity of consumption may significantly be driven by memorable goods expenditures.

Keywords: Memorable Goods, Consumption Volatility, Welfare Cost of Income Risk

JEL Classification: D91, E21

Suggested Citation

Hai, Rong and Krueger, Dirk and Postlewaite, Andrew, On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods (June 26, 2020). PIER Working Paper No. 20-025, Available at SSRN: https://ssrn.com/abstract=3638318 or http://dx.doi.org/10.2139/ssrn.3638318

Rong Hai

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

HOME PAGE: http://https://sites.google.com/site/ronghaiecon/

Dirk Krueger

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Goethe University Frankfurt

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Andrew Postlewaite (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7350 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~apostlew

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