Risk-Sensitive Consumption and Savings under Rational Inattention
AbstractThis paper studies the consumption-savings behavior of households who have risk-sensitive preferences and suffer from limited information-processing capacity (rational inattention or RI). We first solve the model explicitly and show that RI increases precautionary savings by interacting with income uncertainty and risk sensitivity. Given the closed-form solutions, we find that the RI model displays a wide range of observational equivalence properties, implying that consumption and savings data cannot distinguish between risk sensitivity, robustness, or the discount factor, in any combination. We then show that the welfare costs from RI are larger for risk-sensitive households than any other observationally-equivalent settings. (JEL D11, D81, D82, E13, E21)
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Journal: Macroeconomics.
Volume (Year): 2 (2010)
Issue (Month): 4 (October)
Other versions of this item:
- Eric R. Young & Yulei Luo, 2008. "Risk-sensitive Consumption and Savings under Rational Inattention," 2008 Meeting Papers 64, Society for Economic Dynamics.
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Yulei Luo & Jun Nie & Eric R. Young, 2012. "Model uncertainty, state uncertainty, and state-space models," Research Working Paper RWP 12-02, Federal Reserve Bank of Kansas City.
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- Yulei Luo & Jun Nie & Eric R. Young, 2010. "Robustness, information-processing constraints, and the current account in small open economies," Research Working Paper RWP 10-17, Federal Reserve Bank of Kansas City.
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"Robust Control, Informational Frictions, and International Consumption Correlations,"
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- Yulei Luo & Jun Nie & Eric R. Young, 2010. "Robust control, informational frictions, and international consumption correlations," Research Working Paper RWP 10-16, Federal Reserve Bank of Kansas City.
- Yulei Luo & Jun Nie & Eric R. Young, 2012. "Model uncertainty and intertemporal tax smoothing," Research Working Paper RWP 12-01, Federal Reserve Bank of Kansas City.
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