"On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods", Second Version

We propose a new category of consumption goods, memorable goods, that generate a flow of utility after consumption. We analyze an otherwise standard consumption model that distinguishes memorable goods from other nondurable goods. Consumers optimally choose lumpy consumption of memorable goods. We then empirically document significant differences between levels and volatilities of memorable and other nondurable good expenditures. In two applications we find that the welfare cost of consumption fluctuations driven by income shocks are significantly overstated if memorable goods are not accounted for and that estimates of excess sensitivity of consumption might be entirely due to memorable goods.

Information

Paper Number: 14-012

Paper Year: 2014

Authors:

Rong Hai
Andrew Postlewaite
Dirk Krueger