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I am thinking about the first of the month. I spend more of my money on superior goods and, because of that decision, less on normal and inferior goods. Are income and substitution effects enough to explain this or not?

I am thinking about a hypothesis for why people change their types of goods given that budgets change according to pre-decisions.

I will not misguide you: this is not only a goods decision or money constraint; it is also related to the time constraint and time-involved work.

For example, an agent has a given time constraint, T, to work on his given projects over a time period, t, which requires only T-r amounts of time for the period t+1. Hence he spends the time r to do other things according to opportunity cost theory. Therefore, he spends his time working on this project only at amounts equivalent to T-r and the opportunity cost of this project decreases as time approaches t+1.

So at this point, if he is an expert at this job, everything will go smoothly but, if not, this is a false prediction and the agent has to face his false decision and survive on his present condition. The hypothesis starts here: 1. Will he increase his purchasing power (i.e., sleep less to increase the time constraint)? 2. Will he bargain with his boss to increase his time constraint? Why?

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    $\begingroup$ Are you talkíng about the pay-day effect or a permanent shift due to higher income? I talked to the owner at one of my lunch places and his establishment experiences a pay-day effect. $\endgroup$ – Klas Lindbäck May 2 '18 at 13:10
  • $\begingroup$ I have not acknowledged the pay-day effect so could you please briefly explain it. Also, My hypothesis is this agent will change his behavior to increase or decrease the purchasing power as if the planned expenditure went wrong . $\endgroup$ – EconBoy May 2 '18 at 13:13
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    $\begingroup$ Some people spend their paycheck as soon as they get it. Pay-day = shopping spree, rest of the month = poor. If wages are paid monthly the pay-day effect can be quite pronounced. $\endgroup$ – Klas Lindbäck May 2 '18 at 13:20
  • $\begingroup$ That also helps my hypothesis but still, I want to describe the behavior when the agent is running out of budget whether it is time or money as the result of intention or unexpected outcome. 1. Will he change buying behavior ? 2 Will he make a debt instead? $\endgroup$ – EconBoy May 2 '18 at 13:24
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    $\begingroup$ There is no rule. It is a matter of preference, so some will go for option 1 and some for option 2. $\endgroup$ – Klas Lindbäck May 2 '18 at 14:08
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If you research "discount rates", "time preference" or similar, you'll find all sorts of stuff about seemingly inconsistent decisions, some of which can in fact be explained quite well and some of which show some ways that people can be dumb sometimes. You'll find lots of approaches to modelling comparisons involving things like someone revealing an implicit interest rate of over 100% per annum in one situation while accepting 5% as a good return in another situation.

I wouldn't focus too much on any specific paper. Check the bibliographies and see the variety of what's out there, and maybe narrow in on a handful of most-promising conceptualizations afterwards.

As a point of contrast, you could introduce the lifetime income hypothesis of Friedman as discussed in many 1st and 2nd year textbooks.

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  • $\begingroup$ Thank you so much but I don't mind if you give me some specific articles of journal or even the topics for me to look at, but again discount rates and time preference are the methods or tools to convert utility and consumption into present value. I considered the lifetime hypothesis and the result is we cannot identify that as a sure thing like my example as their involve too much of uncertainty . $\endgroup$ – EconBoy May 3 '18 at 7:20
  • $\begingroup$ Here's one on "gamma discounting": aeaweb.org/articles?id=10.1257/aer.91.1.260. Quite a variety of assumptions or modelling of discount rates can be consistent with lifetime hypothesis. $\endgroup$ – nathanwww May 3 '18 at 21:56

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