Leslie Sheng Shen
American Economic Journal: Macroeconomics (Forthcoming)
We show that prior lifetime experiences can “scar” consumers. Consumers
who have lived through times of unemployment exhibit persistent pessimism
about their future financial situation and spend significantly less years later,
controlling for income, employment, and other life-cycle consumption factors.
Due to their experience-induced frugality, scarred consumers build up more
wealth. We use a stochastic life-cycle model to show that financial constraints
and traditional models of income and unemployment scarring fail to generate
the negative relationship between past experiences and consumption, while it
is consistent with experience-based learning.