Gilboa , Andrew Postlewaite and Larry Samuelson

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 memories that consumption generates. A memorable good, such as a honeymoon or a vacation, is a good whose mental consumption outlives its physical consumption. We consider a model in which a consumer enjoys physical consumption as well as memories. Memories 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. The model shows how rational consumers, taking into account their future memories, 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 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. SES1260753, Postlewaite, and SES-1153893, Samuelson) for financial support.