Mistakes in Future Consumption, High MPCs Now

Chen Lian

American Economic Review: Insights, 2023, vol. 5, issue 4, 563-81

Abstract: In a canonical intertemporal consumption model, future consumption mistakes (in response to saving changes) lead to higher current marginal propensities to consume (MPCs). These mistakes increase the value of changing current consumption relative to changing saving, as additional saving will not be spent optimally. Various behavioral biases can cause these mistakes, such as inattention, present bias, diagnostic expectations, and near-rationality (epsilon-mistakes). This result helps explain the empirical puzzle of high-liquidity consumers' high MPCs. In my approach, predictions of sophistication (anticipation of future mistakes) can be derived independently of the underlying biases.

JEL-codes: D15 D91 E21 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/aeri.20220452 (application/pdf)
https://doi.org/10.3886/E186301V1 (text/html)
https://www.aeaweb.org/doi/10.1257/aeri.20220452.appx (application/pdf)
https://www.aeaweb.org/doi/10.1257/aeri.20220452.ds (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aerins:v:5:y:2023:i:4:p:563-81

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

DOI: 10.1257/aeri.20220452

Access Statistics for this article

American Economic Review: Insights is currently edited by Amy Finkelstein

More articles in American Economic Review: Insights from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().