Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7359466 | Journal of Economic Theory | 2016 | 42 Pages |
Abstract
People often consume non-durable goods in a way that seems inconsistent with preferences for smoothing consumption over time. We suggest that such patterns of consumption can be better explained if one takes into account the future utility flows generated by memorable consumption goods-goods, such as a honeymoon or a vacation, whose utility flow outlives their physical consumption. We consider a model in which a consumer enjoys current consumption as well as utility generated by earlier memorable consumption. Lasting utility flows are generated only by some goods, and only when their consumption exceeds customary levels by a sufficient margin. We offer axiomatic foundations for the structure of the utility function and study optimal consumption in a dynamic model. We show that rational consumers, taking into account future utility flows, would make optimal choices that rationalize lumpy patterns of consumption.
Related Topics
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Economics and Econometrics
Authors
Itzhak Gilboa, Andrew Postlewaite, Larry Samuelson,