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Economic Agents as Imperfect Problem Solvers

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  • Rosen Valchev

    (Boston College)

  • Cosmin Ilut

    (Duke University)

Abstract

In this paper, we study a bounded rationality model where agents find it costly to solve economic problems, even if state variables are perfectly observed. We analyze how this hypothesis is complementary, but distinct, from the traditional approach of `information constraints', where agents are limited in the proper perception of state variables. We consider several classic economic problems, with a particular focus on macroeconomic models, to derive observable implications that differentiate our proposed friction from the existing bounded rationality approaches. The model generates state-dependent decision rules characterized by inaction, as well as by under- or over-reaction. In terms of policy implications, we show how the cognition friction can change inference on the underlying sources of economic mechanisms and shocks.

Suggested Citation

  • Rosen Valchev & Cosmin Ilut, 2017. "Economic Agents as Imperfect Problem Solvers," 2017 Meeting Papers 1285, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1285
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    2. Francesco D’Acunto & Daniel Hoang & Michael Weber, 2020. "Managing Households' Expectations with Unconventional Policies," NBER Working Papers 27399, National Bureau of Economic Research, Inc.
    3. Artem Kuriksha, 2021. "An Economy of Neural Networks: Learning from Heterogeneous Experiences," Papers 2110.11582, arXiv.org.
    4. D'Acunto, Francesco & Hoang, Daniel & Paloviita, Maritta & Weber, Michael, 2019. "IQ, Expectations, and Choice," Research Discussion Papers 2/2019, Bank of Finland.
    5. Hassan Afrouzi, 2020. "Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money," CESifo Working Paper Series 8218, CESifo.
    6. Andrade, Philippe & Gautier, Erwan & Mengus, Eric, 2020. "What Matters in Households' Inflation Expectations?," CEPR Discussion Papers 14905, C.E.P.R. Discussion Papers.
    7. Bruno Albuquerque & Georgina Green, 2022. "Financial Concerns and the Marginal Propensity to Consume in COVID Times: Evidence from UK Survey Data," IMF Working Papers 2022/047, International Monetary Fund.
    8. Nimark, Kristoffer P. & Sundaresan, Savitar, 2019. "Inattention and belief polarization," Journal of Economic Theory, Elsevier, vol. 180(C), pages 203-228.
    9. D'Acunto, Francesco & Hoang, Daniel & Paloviita, Maritta & Weber, Michael, 2019. "Human frictions in the transmission of economic policy," Working Paper Series in Economics 128, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    10. Mackowiak, Bartosz Adam & Matejka, Filip & Wiederholt, Mirko, 2020. "Rational Inattention: A Review," CEPR Discussion Papers 15408, C.E.P.R. Discussion Papers.
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    13. Ruediger Bachmann & Kai Carstensen & Stefan Lautenbacher & Martin Schneider, 2021. "Uncertainty and Change: Survey Evidence of Firms' Subjective Beliefs," NBER Working Papers 29430, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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