Thursday, 6th December 2018
13:30 - 14:30
CESS Seminar Rooms - 3 George Street Mews
Saving and Spending in Hard Times
Amid recent financial crises, political debates over fiscal policy ultimately hinge on whether citizens spend too much, too little, or just right. Previous experiments find that people typically spend too much because of how they discount the future. I propose that people’s motive to preserve their savings can instead cause them to spend too little in hard times. I design an economic game in which participants can store resources for the future to survive in a harsh environment. A player’s income is uncertain and consumption yields diminishing returns within each day, creating tradeoffs between spending and saving. I compare participants’ decisions to a heuristic that performed best in simulations. Across multiple experiments, I find that participants spent too much after windfalls in income, consistent with previous research, but they also spent too little after downturns, supporting the resource preservation hypothesis. These findings show that after a drop in income people tend toward austerity and spend less than is most efficient for smoothing consumption. I discuss implications for fiscal policy and future directions examining debt, voting, redistribution, and natural disasters.