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The rigidity of choice: lifetime savings under information-processing constraints

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  • Tutino, Antonella

Abstract

This paper studies the implications of information-processing limits on the consumption and savings behavior of households through time. It presents a dynamic model in which consumers rationally choose the size and scope of the information they want to process about their fi�nancial possibilities, constrained by a Shannon channel. The model predicts that people with higher degrees of risk aversion rationally choose higher information. This happens for precautionary reasons since, with fi�nite processing rate, risk averse consumers prefer to be well informed about their fi�nancial possibilities before implementing consumption plan. Moreover, numerical results show that consumers with processing capacity constraints have asymmetric responses to shocks, with negative shocks producing more persistent effects than positive ones. This asymmetry results into more savings. I show that the predictions of the model can be effectively used to study the impact of tax reforms on consumers spending. The results are qualitatively consistent with the evidence on tax rebates (2001, 2008).

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16744.

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Date of creation: 21 Jun 2008
Date of revision: 24 Jul 2009
Handle: RePEc:pra:mprapa:16744

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Related research

Keywords: Consumption; Rational Inattention; Dynamic programming;

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References

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  13. Kurt F. Lewis, 2008. "The two-period rational inattention model: accelerations and analyses," Finance and Economics Discussion Series 2008-22, Board of Governors of the Federal Reserve System (U.S.).
  14. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
  15. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
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Citations

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Cited by:
  1. Tutino, Antonella, 2011. "Rationally inattentive macroeconomic wedges," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 344-362, March.
  2. Alisdair McKay & Filip Matejka, 2011. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," Boston University - Department of Economics - Working Papers Series WP2011-026, Boston University - Department of Economics.
  3. James Costain & Anton Nakov, 2011. "Precautionary price stickiness," Banco de Espa�a Working Papers 1122, Banco de Espa�a.
  4. Tutino, Antonella, 2008. "Processing savings and work decisions through Shannon's channels," MPRA Paper 16746, University Library of Munich, Germany, revised 26 Jul 2009.

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