Expansion Of The Behavioral Consumption Theory And Applied Research

The purpose of this paper is to develop a model of intertemporal choice on the basis of the behavioral consumption theory. The model incorporates the conflict of individual's long-run preference and short-run preference and with which one can analysis the formation of time preference rate and stage characters of consumer behavior since Chinese Reform and Opening Up began. This paper is composed by three parts.First, we review the emergence and development of consumption theory. We will argue that, though the neoclassical consumption theory is rooted in the life-cycle hypothesis and the permanent income hypothesis, there are deep gaps between the two theories. The life-cycle hypothesis tries to reveal how consumer can arrange the uses of resources of the whole life effectively, while the permanent income hypothesis argues that consumption is determined by permanent income, which is related to the subjective rate of time preference. If the permanent income function is continuous, the inverse of time preference rate can be seen as the effective time span of calculating permanent income. The empirical evaluation shows that time preference rate is very high, which means that the effective time span of calculating permanent income is only several years. This follows the conclusion that the consumer planning horizon is rather shorter than the whole life time, which is more agreed with the empirical intuition. Unfortunately, the life-cycle hypothesis can be expressed as a dynamic maximization problem while the permanent income hypothesis cannot explain how the time preference rate is determined clearly. So economists abandon the empirical conclusion of permanent income hypothesis and integrate this hypothesis into the life-cycle hypothesis arbitrarily. This is the primary version of neoclassical consumption theory. Undoubtedly, this theory cannot explain and predict the real consumer behavior effectively.Second, we find that the determination of time preference rate can be described by the behavioral consumption theory with some modisfications, which can then make the abandoned viewpoint of the permanent hypothesis come back. The behavioral consumption theory is the research on consumer behavior based on the methodology of behavioral economics. Behavioral economics can be seen as the qualitative break of neoclassical economics. This paper is based on the dual-self model and assumes that any individual is composed of two personalities, one is planner who is concerned with the long-run preference and the other is doer who is concerned with the immediate preference. Thus, any decision can be seen as the conflict of the two personalities. The planner who wants to realize the long-run optimal consumption plan must impose some constraint on the does of each period. Willpower and mental account system is the two ways by which doers can be controlled. This is the self control problem of individual. Generally speaking, using mental account system is cheaper than willpower. There exist three main mental accounts which are current disposable account, current asset account, and future income account, respectively. These accounts are not fungible, and the marginal propensity to consume is assumed to be account specific, which means that individual can change the marginal propensity to consume by rearrange the structure of accounts. We will prove that when the planner controls the does by mental accounts, the final consumption plan cannot reach any first order condition. This means that the constraint by mental accounts may stop individual's consumption even he has the willingness to consume. Thus time preference rate will be very high. This is a possible theoretical explanation to the empirical conclusion of the permanent hypothesis.Third, we investigate the consumer behavior since Chinese Reform and Opening Up began. Because of the reform, there exist obvious stage characters of consumer behavior. We divide the whole phase after 1978 into two stages, one is called "Imperfect Consumer Market" (1978-1990), the other is called "the Primal Progress of Consumer Market Reform" (1991-2007). We investigate the excess sensitiveness of short-term consumption fluctuation to income fluctuation and the relationship of long-term consumption growth with income growth. We find that the stage characters of consumer behavior cannot be negligent. Furthermore, we evaluate the consumer time preference rate since 1978. We find that the value of time preference rate is very high and increasing with years. This means that the consumer planning horizon is decreasing. With the implications of dual-self model, we can then predict that consumers impose more and more control on themselves and the proportion of current disposable account in mental account system is lower. This is why the consumer demand is insufficient since 1990. So we investigate the changes of saving motives of individuals and find that the precautionary motive, children-education motive and bequest motive are very intensive since 1990 which urge individuals to change their structure of mental account system. We will argue that the reform of public welfare system and the worsening of income distribution are two important reasons which can explain the changes of saving motives since 1990. This will be followed by some policy implications: On one hand, government should tax current asset account and future income account of the high-income population such as death tax and house tax, so that they may adjust their mental accounts structure and the proportion of current disposable account will be higher. On the other hand, government should raise the expenses on social security and public education rather than transfer payment. This will enlarge current asset account and future income account of the low-income population and they may store more spendable resources in current disposable account. Thus, the whole population will raise their propensities to consume and the consumption demand will increase.