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Optimal Amount of Attention to Capital Income Risk and Heterogeneous Precautionary Saving Behavior

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  • Penghui Yin

Abstract

This paper studies heterogeneous precautionary saving behavior under rational inattention. In the model, consumers face uninsured capital income risk, have CRRA preferences, and suffer from an information-processing capacity constraint. For given attention devoted to capital income risk, I solve for the optimal consumption-saving choices and show that the expected utility from consumption is increasing with the amount of attention. Furthermore, I solve for the optimal attention choice and find that households with more initial wealth would pay less attention to capital income risk. As a result, wealthier households have higher perceived uncertainty in their future capital income and display precautionary motive by saving at higher rates. I also provide empirical evidence to support these results by using data from 2016 wave of the Survey of Consumer Finances.

Suggested Citation

  • Penghui Yin, 2018. "Optimal Amount of Attention to Capital Income Risk and Heterogeneous Precautionary Saving Behavior," CESifo Working Paper Series 7413, CESifo.
    • Handle: RePEc:ces:ceswps:_7413
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    More about this item

    Keywords

    consumption-saving decision; information-processing constraint; capital-income risk;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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