Title

Quick-Fixing: Near-Rationality in Consumption and Savings Behavior

Author(s)

Karthik Sastry Karthik Sastry (Princeton University and NBER)

Peter Andre Peter Andre (Leibniz Institute for Financial Research SAFE)

Joel P. Flynn Joel Flynn (Yale University)

Georgios Nikolakoudis Georgios Nikolakoudis (Princeton University)

Abstract

When optimizing consumption-savings decisions is costly, people may instead rely on quick-fixes, simple policy functions that avoid these costs. We introduce a model of quick-fixing. To study it empirically, we field a novel survey that measures households’ consumption policy functions in response to income shocks. Almost 70% of households follow one of four simple quick-fixes that fully consume or fully save out of small shocks, but they abruptly adjust their behavior for large shocks. This behavior accounts for almost half of the cross-sectional variance in marginal propensities to consume, but is poorly predicted by other demographic and economic information. In an incomplete-markets model calibrated to match our evidence, we find that quick-fixing is near-rational: the average opportunity cost of quick-fixing is only $17 per quarter. Yet, this small, empirically realistic deviation from the rational model significantly alters aggregate consumption responses to income shocks of varying sizes.

Creation Date

2025-02

Section URL ID

Paper Number

URL

https://www.nber.org/papers/w33464

File Function

Jel

E21, E62, E70, G51

Keyword(s)

Suppress

false

Series

13