Reference-dependent consumption plans

Botond Koszegi, Matthew Rabin

Research output: Contribution to journalArticlepeer-review

Abstract (may include machine translation)

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).

Original languageEnglish
Pages (from-to)909-936
Number of pages28
JournalAmerican Economic Review
Volume99
Issue number3
DOIs
StatePublished - Jun 2009
Externally publishedYes

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