The Self-Constrained Hand-to-Mouth

Many studies have shown that consumption responds to the arrival of predictable income (excess sensitivity). This paper uses a buffer stock model of consumption to understand what causes excess sensitivity and to test which parametrization is consistent with empirical excess sensitivity estimates. Using high frequency granular data from a personal finance app, it finds that while liquidity constraints are a proximate cause, preferences are the ultimate cause of excess sensitivity. Furthermore, it finds that for feasible parameters, a quasi hyperbolic version of the model is more consistent with the level of excess sensitivity relative to a standard exponential model.

On the welfare cost of consumption fluctuations in the presence of memorable goods

We propose a new category of consumption goods, memorable goods, that generate a utility flow even after physical consumption. Empirically, memorable goods expenditures exhibit frequent zero monthly purchases and lumpy expenditure spikes. Memorable goods expenditures are 20% the size of nondurable expenditures, but three times as volatile. We then develop a consumption‐savings model with borrowing constraints and income risk that formalizes the notion of memorable goods and distinguishes them from other nondurable goods. We show that consumers optimally choose lumpy consumption of memorable goods. We then measure the welfare cost of consumption fluctuations using our calibrated model and empirically evaluate our calibrated model's predictions for the consumption response to predictable income changes. We find that the welfare cost of household‐level consumption fluctuations induced by income shocks fall from 20.4 to 12.3 percentage points if memorable goods are accounted for, and that empirical estimates of excess sensitivity of consumption may significantly be driven by memorable goods expenditures.

The decumulation period of a personal pension with risk sharing: investment approach versus consumption approach

This paper models the decumulation period of a Personal Pension with Risk sharing (PPR). We derive several relationships between the contract parameters. Individuals can adopt two approaches to the decumulation period of a PPR: the investment approach and the consumption approach. In the investment approach, individuals specify how to invest wealth and how much wealth to withdraw. Retirement consumption follows endogenously. In the consumption approach, in contrast, individuals specify retirement consumption exogenously. Investment and withdrawal policies follow endogenously. We explore these two approaches in detail. Consistent with habit formation, we allow for excess smoothness and excess sensitivity in retirement consumption.

The Precautionary Saving Model

The chapter removes the assumption of quadratic utility and examines situations in which consumers respond to income risk by increasing current saving to protect against future shocks to income. This motive for saving is called precautionary saving, and it provides an explanation for some of the empirical findings in the literature, such as the observation that people with more volatile incomes tend to save more than individuals with more stable income patterns. Moreover, it can also explain the excess sensitivity of consumption to expected income changes. Indeed, a model with precautionary saving produces a good many predictions similar to those of the model with liquidity constraints.