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Rationally inattentive consumption choices

  • Antonella Tutino

    (Federal Reserve Bank of Dallas)

This paper analyzes how information-processing limitations affect consumption in a dynamic full-fledged non-linnear quadratic Gaussian (LQG) setting. In the model, risk-averse consumers rationally choose the quantity and quality of information to process about their wealth, while constrained by a Shannon channel. The main contribution of the paper is methodological. It proposes a solution to rational inattention problems in rich theoretical environments. The main prediction of the model is that consumption responses to wealth shocks are asymmetric, with negative shocks producing faster and stronger reaction than positive shocks. The model also predicts that information processing constraints increase persistence and volatility of consumption behavior. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2012.03.003
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 16 (2013)
Issue (Month): 3 (July)
Pages: 421-439

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Handle: RePEc:red:issued:11-143
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