Scarred Consumption

Ulrike Malmendier and Leslie Sheng Shen

No 1259, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We show that prior lifetime experiences can \"scar\" consumers. Consumers who have lived through times of high unemployment exhibit persistent pessimism about their future financial situation and spend significantly less, controlling for the standard life-cycle consumption factors, even though their actual future income is uncorrelated with past experiences. Due to their experience-induced frugality, scarred consumers build up more wealth. We use a stochastic lifecycle model to show that the negative relationship between past experiences and consumption cannot be generated by financial constraints, income scarring, and unemployment scarring, but is consistent with experience-based learning.

Keywords: Household consumption; Experience effects; Expectation; lifecycle models (search for similar items in EconPapers)
JEL-codes: D12 D15 D83 D91 G51 (search for similar items in EconPapers)
Pages: 93 pages
Date: 2019-10-09
New Economics Papers: this item is included in nep-dge and nep-ore
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Citations: View citations in EconPapers (2)

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https://www.federalreserve.gov/econres/ifdp/files/ifdp1259.pdf (application/pdf)

Related works:
Journal Article: Scarred Consumption (2024)
Working Paper: Scarred Consumption (2020)
Working Paper: Scarred Consumption (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1259

DOI: 10.17016/IFDP.2019.1259

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