Reference-Dependent Consumption Plans | Zendy

Botond Kőszegi | Zendy; Matthew Rabin | Zendy

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Reference-Dependent Consumption Plans

Author(s) -

Botond Kőszegi,

Matthew Rabin

Publication year - 2009

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.99.3.909

Subject(s) - surprise , consumption (sociology) , economics , order (exchange) , microeconomics , autonomous consumption , monetary economics , public economics , finance , psychology , social psychology , social science , aggregate expenditure , sociology

We develop a rational dynamic model in which people are loss averse over changes in beliefs about present and future consumption. Because changes in wealth are news about future consumption, preferences over money are reference-dependent. If news resonates more when about imminent consumption than when about future consumption, a decision maker might (to generate pleasant surprises) overconsume early relative to the optimal committed plan, increase immediate consumption following surprise wealth increases, and delay decreasing consumption following surprise losses. Since higher wealth mitigates the effect of bad news, people exhibit an unambiguous first-order precautionary-savings motive. (JEL D14, D81, D83, D91)

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