Mistakes in Future Consumption, High MPCs Now

20.500.12592/ppj1xh

Mistakes in Future Consumption, High MPCs Now

24 Nov 2021

In a canonical intertemporal consumption problem, I show how anticipation of future consumption mistakes leads to higher current marginal propensities to consume (MPCs). This result is driven by mistakes in future consumption's response to saving changes (i.e., changes in asset balances) and is independent of their specific behavioral foundations. My framework can accommodate many widely studied behavioral biases, such as inattention, present bias, diagnostic expectations, and near-rationality (epsilon-mistakes). This channel helps explain the empirical puzzle on high-liquidity consumers' high MPCs and can be significant. The same channel can also help explain other puzzles in intertemporal choices, such as violations of the fungibility principle, excess discounting of future income, and large risk aversion. Methodologically, I develop a general approach to study predictions of sophistication (i.e., the anticipation of future mistakes) independent of the underlying behavioral biases.
macroeconomics microeconomics financial economics monetary economics behavioral economics behavioral finance economic fluctuations and growth consumption and investment

Authors

Chen Lian

Acknowledgements & Disclosure
I am extremely grateful to Marios Angeletos, Alp Simsek and Ricardo Caballero for continuous guidance through the project. I am grateful to Hassan Afrouzi (discussant), Nick Barberis, Stefano Dellavigna, Yuriy Gorodnichenko, Pierre-Olivier Gourinchas, Jonathon Hazell, Martin Holm, Julian Kozlowski, Yueran Ma, Emi Nakamura, Michaela Pagel, Jonathan Parker, Karthik Sastry, Benjamin Schoefer, Frank Schilbach, Jon Steinsson, Dmitry Taubinsky, Adam Szeidl, Andrei Shleifer, Ludwig Straub, Ivan Werning, and Muhamet Yildiz, and seminar participants at Berkeley, Berkeley-Chicago Behavioral Seminar, BI Norwegian Business School, China Star Tour, CICM 2021, Chicago Booth, Columbia, Duke, Duke Fuqua, MIT, Yale SOM, SED 2021, Stanford GSB for very helpful comments and discussions. I am grateful to Martin Holm for sharing his data. This paper is a more general version of and replaces the job market version named “Consumption with Imperfect Perception of Wealth.” I acknowledge the financial support from Alfred P. Sloan Foundation Pre-doctoral Fellowship in Behavioral Macroeconomics, awarded through the NBER. Bruno Smaniotto provides excellent research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
DOI
https://doi.org/10.3386/w29517
Published in
United States of America

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