Mental Accounting and the Marginal Propensity to Consume (60min)
This paper examines theoretical explanations for heterogeneity in consumption responses to unexpected, transitory income shocks. In a randomized control trial I elicit marginal propensities to consume (MPC) in different hypothetical income shock scenarios, varying the size and the payment mode of the income shock. I find that the MPC decreases with the shock size. Earmarking windfalls for saving via the payment mode induces a lower MPC, suggesting that consumers violate fungibility.
Using causal machine learning methods to explore treatment heterogeneity, I find that self-control problems, lack of cognitive sophistication and financial planning, and low liquidity contribute to MPC heterogeneity. The results are broadly in line with mental accounting theory.