Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks

NBER Working Paper No. 18248

Issued in July 2012

NBER Program(s):Industrial Organization



We formulate a test of the fungibility of money based on parallel shifts in the prices of different quality grades of a commodity. We embed the test in a discrete-choice model of product quality choice and estimate the model using panel microdata on gasoline purchases. We find that when gasoline prices rise consumers substitute to lower octane gasoline, to an extent that cannot be explained by income effects. Across a wide range of specifications, we consistently reject the null hypothesis that households treat "gas money" as fungible with other income. We evaluate the quantitative performance of a set of psychological models of decision-making in explaining the patterns we observe. We also use our findings to shed light on extant stylized facts about the time-series properties of retail markups in gasoline markets.

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Document Object Identifier (DOI): 10.3386/w18248

Published: The Quarterly Journal of Economics (2013) 128 (4): 1449-1498. doi: 10.1093/qje/qjt018 First published online: June 22, 2013

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