Itzhak Gilboa , Andrew Postlewaite

People often consume non-durable goods in a way that seems inconsistent with preferences for smoothing consumption over time. We suggest that such patterns of consumption can be better explained if one takes into account the future utility flows generated by memorable consumption goods—goods, such as a honeymoon or a vacation, whose utility flow outlives their physical consumption. We consider a model in which a consumer enjoys current consumption as well as utility generated by earlier memorable consumption. Lasting utility flows are generated only by some goods, and only when their consumption exceeds customary levels by a sufficient margin. We offer axiomatic foundations for the structure of the utility function and study optimal consumption in a dynamic model. We show that rational consumers, taking into account future utility flows, would make optimal choices that rationalize lumpy patterns of consumption. ∗We thank Dirk Krueger and Rong Hai for many valuable discussions and thank Hal Cole, two referees and the editor for helpful comments. We thank the European Research Council (Grant no. 269754, Gilboa), the Israeli Science Foundation (Grant 204/14, Gilboa) and the National Science Foundation (Grants nos. SES-1260753, Postlewaite, and SES-1153893 and SES-1459158, Samuelson) for financial support.