A Model of Consumption with Mental Accounting and Heterogeneous Agents

• Authors: Jaime Gimeno-Ribes
• BSE Working Paper: 1550 | January 2026
• Keywords: Heterogeneous agents, mental accounting, marginal propensities to consume, illiquid assets
• JEL codes: D11, D14, D15, D31, D90, E21, E70

This paper studies how mental accounting of income and wealth affects consumption decisions in a heterogeneous agent environment with incomplete markets, idiosyncratic risk, and asset illiquidity. Mental accounting is formalized using elements from reference-dependence with loss aversion, and it offers a unified explanation of empirical facts about marginal propensities to consume (MPC) and the household distribution that elude standard models: the existence of poor, wealthy, and liquid hand-to-mouth; a spender-saver MPC distribution; realistic levels of aggregate MPC, wealth, return spread, and consumption; differential MPCs from dividends and capital gains; non- Ricardian intertemporal MPCs; and asymmetric MPCs with respect to different attributes.