Scarred Consumption

Malmendier, Ulrike; Shen, Leslie Sheng

doi:10.1257/mac.20210387

Abstract

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.

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Scarred Consumption

Abstract

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