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  3. American Economic Review
  4. June 2009
  5. Reference-Dependent Consumption Plans

Reference-Dependent Consumption Plans

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Abstract

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)

Citation

Kőszegi, Botond, and Matthew Rabin. 2009. "Reference-Dependent Consumption Plans." American Economic Review, 99 (3): 909-36. DOI: 10.1257/aer.99.3.909

Additional Materials

JEL Classification

  • D14 Personal Finance
  • D81 Criteria for Decision-Making under Risk and Uncertainty
  • D83 Search; Learning; Information and Knowledge; Communication; Belief
  • D15 Intertemporal Consumer Choice; Life Cycle Models and Saving