Information processing with recursive utility: some intriguing results
AbstractWe study information processing in a simple endowment economy where the mean consumption growth rate are governed by a hidden state variable and agents have recursive preferences. We show that for typical parameter values, there is a strong incentive to commit to ignoring future information on the state of the economy, but that such commitment raises time-inconsistency problems. We estimate the model on postwar US data and find that the representative consumer can achieve a utility gain equivalent to a 20% increase in lifetime consumption simply by not paying attention to the state of the economy.
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Bibliographic InfoPaper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2007 with number 2007-40.
Length: 20 pages
Date of creation: Oct 2007
Date of revision:
Recursive preferences; Epstein-Zin preferences; Uncertainty aversion; Information processing; Time inconsistency;
Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-24 (All new papers)
- NEP-DGE-2007-11-24 (Dynamic General Equilibrium)
- NEP-MAC-2007-11-24 (Macroeconomics)
- NEP-UPT-2007-11-24 (Utility Models & Prospect Theory)
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