Hand-to-Mouth Consumers and Asset Prices

Philippe Weil (1)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

Many consumers seem to lead a hand-to-mouth existence: they simplyconsume their current income. This may be the result of unsophisticatedbehavior (non-optimizing, or ‘rule-of-thumb’ consumers), or the reflection ofan inability to trade in asset markets due to infinite transactions costs. Theobjective of this paper is to explore, in a very simple model, the implicationsfor equilibrium asset prices of the presence of hand-to-mouth consumers. Iwill establish that allowing for the existence of hand-to-mouth consumerscontributes, under plausible assumptions, to the resolution of the equitypremium puzzle’ and of the riskfree rate puzzle. As a consequence, thesame phenomenon - hand-to-mouth consumption - which Campbell andMankiw (1989) have shown to be crucial to the description of the time-seriesbehavior of aggregate consumption has the potential of explaining assetmarket data (...).

Domains: Economics and Finance

Philippe Weil. Hand-to-Mouth Consumers and Asset Prices. European Economic Review, 1992, 36 (2-3), pp.575 - 583. ⟨10.1016/0014-2921(92)90115-D⟩. ⟨hal-03393469⟩