| Abstract: | This paper extends a standard model of consumption to test for the existence of “myopic” consumers. The extended model includes “rule-of-thumb” consumers as well as consumers who are assumed to solve a dynamic programming problem. The model allows this second set of consumers, however, to be “boundedly rational.” For a variety of reasons, they may be unable to fully account for their future uncertain labor income. The model predicts that this inability to correctly value future resources leads to the breakdown of the simple permanent income hypothesis and that consumption responds to predictable changes in income. Using data for the United States for the period 1951-1990, the paper finds evidence of such myopic behavior. |
