scholarly journals On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods

2020 ◽  
Author(s):  
Rong Hai ◽  
Dirk Krueger ◽  
Andrew Postlewaite
Keyword(s):  
Welfare Cost ◽  
Consumption Fluctuations

Individual Consumption Risk and the Welfare Cost of Business Cycles

2007 ◽  
Vol 97 (4) ◽  
pp. 1488-1506 ◽  
Author(s):  
Massimiliano De Santis
Keyword(s):  
Business Cycles ◽  
Idiosyncratic Risk ◽  
Welfare Cost ◽  
Aggregate Fluctuations ◽  
Welfare Gain ◽  
Aggregate Consumption ◽  
Consumption Insurance ◽  
Consumption Risk ◽  
Consumption Fluctuations ◽  
Overall Risk

We measure the welfare gain from removing aggregate consumption fluctuations in a model where each individual faces incomplete consumption insurance. We show that, because this welfare gain is a convex function of the overall consumption risk—aggregate plus idiosyncratic—each individual faces, to gauge the magnitude of the gain, it is important to match individuals' overall risk prior to any policy. In an economy calibrated to match individuals' overall risk, even removing 10 percent of aggregate fluctuations can result in a large welfare gain. Further, large gains do not necessarily depend on the countercyclical nature of idiosyncratic risk. (JEL E21, E32)

scholarly journals The Welfare Cost of Perceived Policy Uncertainty: Evidence from Social Security

2018 ◽  
Vol 108 (2) ◽  
pp. 275-307 ◽  
Author(s):  
Erzo F. P. Luttmer ◽  
Andrew A. Samwick
Keyword(s):  
Social Security ◽  
Risk Premium ◽  
Welfare Cost ◽  
Policy Uncertainty ◽  
Individual Welfare ◽  
Expected Benefits ◽  
Original Survey ◽  
Social Security Benefits ◽  
The Impact ◽  
Consumption Fluctuations

Policy uncertainty reduces individual welfare when individuals have limited opportunities to mitigate or insure against the resulting consumption fluctuations. We field an original survey to measure the degree of perceived policy uncertainty in Social Security benefits and to estimate the impact of this uncertainty on individual welfare. Our central estimates show that on average individuals are willing to forgo 6 percent of the benefits they are supposed to get under current law to remove the policy uncertainty associated with their future Social Security benefits. This translates to a risk premium from policy uncertainty equal to 10 percent of expected benefits. (JEL D14, D81, H55)

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

2020 ◽  
Vol 11 (4) ◽  
pp. 1177-1214 ◽  
Author(s):  
Rong Hai ◽  
Dirk Krueger ◽  
Andrew Postlewaite
Keyword(s):  
Borrowing Constraints ◽  
Welfare Cost ◽  
Income Shocks ◽  
Income Risk ◽  
Household Level ◽  
Nondurable Goods ◽  
Empirical Estimates ◽  
Percentage Points ◽  
Consumption Fluctuations ◽  
Excess Sensitivity

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.

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