Categorisation-enhanced mental-accounting consumer behaviour: demand enhancement and endogenous cycles in an overlapping-generations income-age distribution model

Abstract

Weaknesses of intertemporal optimisation approaches to consumption modelling include excess sensitivity of an individual's expenditure to interest rate changes and the inability to account for the documented behavioural aspects of decision-making, such as mental accounting or infrequent purchases and debt-taking. Credibly representing category-of-goods mental accounting in an intertemporal optimisation framework is notoriously difficult, as this modelling approach imposes interrelations between the demand for different categories through first-order conditions. This breaks the principle of nonfungibility, contrary to the rationale of mental-accounting theory. Thus, a behavioural-procedural framework is needed. This work applies such an approach in the form of a merger with categorisation theories, devised in a separate paper, to modelling consumer demand in a multimarket overlapping-generations agent-based income distribution model. Consumer decisions about spending on nondurable and frequently bought durable goods and infrequently-bought durable goods, such as houses and flats, are subject to different rules, which allows to model real-world features such as infrequent purchases and rare debt-taking. The devised single and multi-agent models of consumer behaviour are consistent both with microeconomic and macroeconomic evidence on consumption. Moreover, the results of the overlapping-generations agent-based income distribution model demonstrate that income changes are greatly enhanced by behavioural responses of consumers, thus creating high aggregate demand growth.