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

  • Tutino, Antonella

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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File URL: http://mpra.ub.uni-muenchen.de/16744/1/MPRA_paper_16744.pdf
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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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  1. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," Discussion Papers 1494, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Jordi Mondria & Climent Quintana‐Domeque, 2013. "Financial Contagion and Attention Allocation," Economic Journal, Royal Economic Society, vol. 123(568), pages 429-454, 05.
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  6. Reis, Ricardo, 2005. "Inattentive Consumers," CEPR Discussion Papers 5053, C.E.P.R. Discussion Papers.
  7. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc.
  8. Yulei Luo, 2008. "Consumption Dynamics under Information Processing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April.
  9. Henry Kim & Jinill Kim & Ernst Schaumburg & Christopher A. Sims, 2005. "Calculating and Using Second Order Accurate Solutions of Discrete Time Dynamic Equilibrium Models," Discussion Papers Series, Department of Economics, Tufts University 0505, Department of Economics, Tufts University.
  10. Kurt Lewis, 2009. "The Two-Period Rational Inattention Model: Accelerations and Analyses," Computational Economics, Society for Computational Economics, vol. 33(1), pages 79-97, February.
  11. Christopher D. Carroll, 2003. "Macroeconomic Expectations Of Households And Professional Forecasters," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 269-298, February.
  12. Susan Dynarski & Jonathan Gruber, 1997. "Can Families Smooth Variable Earnings?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 229-303.
  13. Cochrane, John H, 1989. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," American Economic Review, American Economic Association, vol. 79(3), pages 319-37, June.
  14. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  15. Gourinchas, P.O. & Parker, J.A., 1997. "Consumption Over the Life Cycle," Working papers 9722, Wisconsin Madison - Social Systems.
  16. Campbell, John Y & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 357-73, July.
  17. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  18. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November.
  19. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
  20. Sims, Christopher A., 2005. "Rational inattention: a research agenda," Discussion Paper Series 1: Economic Studies 2005,34, Deutsche Bundesbank, Research Centre.
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