The Consumption Behavior When Consumption Growth Is Low

This paper investigates consumption-behavior heterogeneity across consumption growth levels by analyzing microdata from a unique macro perspective. This innovative approach allows us to test the applicability of Kahneman and Tversky's (1979) S-shaped utility to consumption behaviors with a simple mean regression method that doesn't require specifying the reference points of consumption. We find that the lower and upper quantiles of micro-level consumption growth generally exhibit opposite reactions to macroeconomic changes; the behaviors identified at the lower quantiles contradict conventional wisdom in economics. Our results support an S-shaped consumption utility function. We justify the S-shape using the consumption-based asset pricing framework, which helps exclude explanations of consumption behaviors besides utility functions. Additionally, our related study demonstrates that many pricing anomalies stem from the global concavity of the utility functions used in traditional models, whereas the S-shaped consumption utility offers a plausible solution