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Optimal attention and heterogeneous precautionary saving behavior

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  • Yin, Penghui

Abstract

This paper applies rational inattention theory proposed by Sims (2003) to study a puzzling empirical fact that wealthier individuals have a stronger precautionary saving motive. In the model, consumers face uninsured capital income risk but suffer from an information-processing capacity constraint. I solve for the optimal attention and consumption choices analytically in a Gaussian framework. I find that consumers with more initial wealth pay less attention to the capital income risk. As a result, wealthier consumers have higher perceived uncertainty about their future capital income and display a stronger precautionary motive by saving at higher rates.

Suggested Citation

  • Yin, Penghui, 2021. "Optimal attention and heterogeneous precautionary saving behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 131(C).
  • Handle: RePEc:eee:dyncon:v:131:y:2021:i:c:s0165188921001652
    DOI: 10.1016/j.jedc.2021.104230
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    Cited by:

    1. Yulei Luo & Jun Nie & Penghui Yin, 2022. "Attention Allocation and Heterogenous Consumption Responses," Research Working Paper RWP 22-07, Federal Reserve Bank of Kansas City.

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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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