Pain of Paying in Consumption-Saving Decisions

Abstract

I build a consumption-saving model in which consumers experience a pain of paying that is decreasing and convex in the budget. When consumers receive unexpected windfall gains, their budget increases, lowering their pain of paying and incentivizing them to spend more. Their MPC can be large, even if they are liquid. Consumers who receive a larger windfall or who are more liquid have a lower MPC. I explore the model’s implications for asymmetric consumption smoothing, intertemporal MPCs, and the age profiles of consumption and wealth