Rationality of limited rationality : some aggregate implications
AbstractIn this paper we let economic agents choose whether to become fully rational or stay boundedly rational. Boundedly rational agents are less sophisticated in their information processing abilities. It is costly to acquire information needed to become fully rational, and thus not all agents are willing to incur those costs. We then explore the aggregate effects of endogenizing the decision whether the agent should or should not become fully rational in handling information. Since fully and boundedly rational individuals make different saving and consumption decisions, their interaction has a direct impact on the size of capital stock, aggregate savings and the volatility of output. E.g. we are able to show that in many circumstances our model will imply a smoother consumption than would be observed in a model with only fully rational Consumers.
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Bibliographic InfoArticle provided by Finnish Economic Association in its journal Finnish Economic Papers.
Volume (Year): 7 (1994)
Issue (Month): 2 (Autumn)
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
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