Many studies have shown that consumption responds to the arrival of predictable income (excess sensitivity). This paper uses a buffer stock model of consumption to understand what causes excess sensitivity and to test which parameterization is consistent with empirical excess sensitivity estimates. Using high-frequency granular data from a personal finance app, I find that while liquidity constraints are a proximate cause, preferences are the ultimate cause of excess sensitivity. Furthermore, it finds that for feasible parameters, a quasi-hyperbolic version of the model is more consistent with the level of excess sensitivity relative to a standard exponential model.

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Does mental accounting matter for total consumption expenditures? We exploit a unique setting in which individuals exogenously receive a new payment card, without requesting one. Using random variation in the time of receipt, we show that individuals temporarily increase total consumption expenditure by making purchases with the new card without reducing spending on the others. We do not observe a corresponding increase in indebtedness. Total consumption expenditure rises even for the least liquidity-constrained individuals. The evidence is consistent with consumers treating methods of payment as nonfungible budget categories, as suggested by models of mental accounting and narrow bracketing.

This paper examines the impact of local competition and local firm market power on misconduct by analyzing the investment adviser market. The study is based on an extensive sample of more than 3.8 million employee-year observations of investment advisers resulting in 709,416 firm-county-year observations over 12 years. The findings show that a firm's county-level market power and county market competition have a negative influence on investment adviser misconduct. The result is robust to a battery of empirical tests. We show that a firm exhibits lower levels of misconduct in counties in which it has greater local market power. We also identify the effect of local competition and market power on misconduct using two exogenous shocks, mergers and acquisitions (M&As) and the end of a local monopoly. We establish adviser employment stability as a novel channel for explaining the impact of local competition and firm market power on misconduct.

Low liquidity and a high marginal propensity to consume are tightly linked. This paper analyzes this link in the context of income tax withholding and refunds. A theory of rational cash management with income uncertainty endogenizes the relationship between illiquidity and the marginal propensity to consume, and can explain the finding that households tend to spend tax refunds as if they valued liquidity, yet do not act to increase liquidity by reducing their withholding. The theory is supported by individual-level evidence based on financial account records, including a positive correlation between the size of tax refunds and the marginal propensity to consume out of those refunds.