Working Paper: NBER ID: w18248
Authors: Justine Hastings; Jesse M. Shapiro
Abstract: We formulate a test of the fungibility of money based on parallel shifts in the prices of different quality grades of a commodity. We embed the test in a discrete-choice model of product quality choice and estimate the model using panel microdata on gasoline purchases. We find that when gasoline prices rise consumers substitute to lower octane gasoline, to an extent that cannot be explained by income effects. Across a wide range of specifications, we consistently reject the null hypothesis that households treat "gas money" as fungible with other income. We evaluate the quantitative performance of a set of psychological models of decision-making in explaining the patterns we observe. We also use our findings to shed light on extant stylized facts about the time-series properties of retail markups in gasoline markets.
Keywords: Mental Accounting; Consumer Choice; Gasoline Prices; Price Shocks
JEL Codes: D03; D12; L15; Q41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Gasoline Price Increase (Q31) | Substitution to Lower Octane Gasoline Grades (Q42) |
| Gasoline Price Increase (Q31) | Non-Fungibility of Gasoline Choices (Q31) |
| Financial Crisis of 2008 (Gasoline Prices Fell) (G01) | No Switch Back to Premium Gasoline (Q42) |
| Income Effects (H31) | Plausibility of Observed Behavior (C92) |
| Gasoline Prices (N72) | Quality Choice in Non-Gasoline Purchases (L99) |