Tutino, Antonella (2008): The rigidity of choice: lifetime savings under information-processing constraints.
Download (676kB) | Preview
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).
|Item Type:||MPRA Paper|
|Original Title:||The rigidity of choice: lifetime savings under information-processing constraints|
|Keywords:||Consumption, Rational Inattention, Dynamic programming|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
D - Microeconomics > D9 - Intertemporal Choice and Growth > D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief
|Depositing User:||Antonella Tutino|
|Date Deposited:||11. Aug 2009 15:13|
|Last Modified:||13. Feb 2013 11:48|
Allen, F., S. Morris and H. S. Shin, (2006), Beauty Contests, Bubbles and Iterated Expectations in Asset Markets Review of Financial Studies, 19, pp. 719-752.
Alvarez, F. and N. Stockey, (1998), Dynamic Programming with Homogeneous Func- tions, Journal of Economic Theory, 82, pp.167-189.
Angeletos G.-M. and A. Pavan, (2004), Transparency of Information and Coordina- tion in Economies with Investment Complementarities, American Economic Review, papers and proceedings, 94 (2), pp.91-98.
Astrom, K. (1965), Optimal Control of Markov decision process with incomplete state estimation. Journal of Mathematical Analysis and Applications 10, pp.174-205
Blanchard, O. J. and Mankiw, N G., (1988) Consumption: Beyond Certainty Equiv- alence American Economic Review, American Economic Association, vol. 78(2), pp. 173-77.
Broda, C. and J. Parker (2008), A preliminary analysis of how household spending changed in response to the receipt of a 2008 economic stimulus payment. Mimeo.
Caballero, R. J. (1990), Expenditure on Durable Goods: a case for slow adjustment, The Quarterly Journal of Economics, Vol. 105, No. 3. pp. 727-743.
Caballero, R. J. (1995), Near-rationality, Heterogeneity and Aggregate Consumption, Journal of Money, Credit and Banking, 27 (1), pp29-48.
Campbell, J.Y. (1987), Does Savings Anticipate Declining Labor Income? An alter- native Test of the Permanent Income Hypothesis, Econometrica, 55, pp.1249-1273.
Campbell, J.Y. and A. Deaton (1989), Why is Consumption so Smooth? Review of Economic Studies, 56, pp.357-374.
Campbell, J.Y. and N. G. Mankiw (1989), Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence, NBER Macroeconomic Annual 4, pp.185- 216.
Campbell, J.Y. and N. G. Mankiw (1989), Permanent Income, Current Income and Consumption, Journal of Business and Economic Statistics, 8 (3), pp.265-279.
Carroll, C. D. (2003) Macroeconomic Expectations of Households and Professional Forecasters, Quarterly Journal of Economics, 118 (1), pp. 269-298.
Cochrane, J.H. (1989), The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives, American Economic Review, 90, pp.319-337.
Cover, J. P., (1992), Asymmetric E¤ects of Positive and Negative Money-Supply shocks, The Quarterly Journal of Economics, Vol. 107, No. 4, pp.1261-1282. 41
Cover, T.M. and J. A. Thomas, Elements of Information Theory, John Wiley & Sons, Inc., 1991
Deaton, A. (1992), Understanding Consumption, Oxford, University Press.
DeLong, J., and L. Summers (1988). How does macroeconomic policy a¤ect output?, Brookings Papers on Economic Activity, 2: pp. 433-480.
Dynarski, S. and J. Gruber (1997), Can Families Smooth Variable Earnings?, Brook- ings Papers on Economic Activity, Vol.1997 No. 1, pp.229-284.
Flavin, M. A. (1981), The Adjustment of Consumption to Changing Expectations about Future Income, Journal of Political Economy, 89, pp. 974-1009.
Friedman, M. (1957), A Theory of the Consumption Function, Princeton, Princeton University Press.
Garcia, R., Lusardi, A. and S. Ng, (1997), Excess sensitivity and asymmetries in consumption: an empirical investigation, Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29 (2), pp. 154-76.
Gourinchas, P-O, and J.A. Parker (2002), Consumption over the Life-Cycle, Econo- metrica, vol. 70 (1), pp.47-89.
Hall, R. (1978), Stochastic Implications of the Life Cycle-Permanent Income Hy- pothesis: Theory and Evidence, Journal of Political Economy, 86, pp.971-987..
Johnson, D., Parker, J. and N. Soules (2006) Household expenditure and the income tax rebates of 2001. American Economic Review, Vol. 96, No. 5.
Kim, J., Kim, S., Schaumburg, E. and C. Sims (2005). Calculating and Using Second Order Accurate Solutions of Discrete Time Dynamic Equilibrium Models. Mimeo.
Lewis, K. (2007), The life-cycle e¤ects of information-processing constraints. Work- ing Paper, University of Iowa.
Lewis, K. (2008), The Two-Period Rational Inattention Model: Accelerations and Analyses, Computational Economics, Forthcoming. Currently available as Federal Reserve Financial and Economics Discussion Series Paper, No. 2008-22, Board of Governors .
Lucas, R.E. (1972), Expectations and the Neutrality of Money. Journal of Economic Theory, 4, 103-124.
Luo, Y. (2008): Consumption Dynamics under Information Processing Constraints. Review of Economic Dynamics, 11, pp, 366� 385
MacKay, David J. C (2003). Information Theory, Inference, and Learning Algo- rithms, Cambridge University Press, 2003 42
Ma´ckowiak, B., and M. Wiederholt (2008a), Optimal Sticky Prices under Rational Inattention, American Economic Review, forthcoming.
Ma´ckowiak, B., andM.Wiederholt (2008b), Business cycles dynamics under rational inattention, Mimeo.
Mankiw, N.G. and R. Reis (2002), Sticky information versus sticky prices: A pro- posal to replace the New Keynesian Phillips curve, Quarterly Journal of Economics 117, 1295�1328.
Mondria, J. (2006), Financial Contagion and Attention Allocation, Working paper, University of Toronto.
Moscarini, G. (2004), Limited Information Capacity as a Source of Inertia, Journal of Economic Dynamics and Control, pp. 2003�2035.
Mullainathan, S. (2002), A Memory-Based Model of Bounded Rationality, Quarterly Journal of Economics, 117 (3), pp. 735-774.31.
Parker, J. (1999) The Reaction of Household Consumption to Predictable Changes in Social Security Taxes, American Economic Review, 89 (4), pp. 959-973.
Pischke, J.-S. (1995) Individual Income, Incomplete Information, and Aggregate Consumption, Econometrica, 63 (4), pp. 805-840.
Puterman, M.L. (1994), Markov Decision Processes: Discrete Stochastic Dynamic Programming, Wiley Series in Probability and Mathematical Statistics, John Wiley and Sons, Inc.
Reis, R. A. (2006) Inattentive Consumers, Journal of Monetary Economics, 53 (8), 1761-1800.
Romer, C. and D. H. Romer (2007). The macroeconomic e¤ects of tax changes: estimates based on a new measure of �scal shocks. NBER Working Paper No. 13264, July 2007.
Shea, J. (1995), Union Contracts and the Lifecycle/Permanent-Income Hypothesis. American Economic Review, 85(1):186-200.
Sims, C. A. (1998), Stickiness, Carnegie-Rochester Conference Series On Public Policy, 49(1), 317�356.
Sims, C. A. (2003), Implications of Rational Inattention, Journal of Monetary Eco- nomics, 50(3), 665�690.
Sims, C. A.(2005), Rational Inattention: a Research Agenda, American Economic Review Papers and Proceedings, 96, 158-163.. 43
Woodford, M. (2002), Imperfect Common Knowledge and the Effects of Monetary Policy, in P. Aghion, R. Frydman, J. Stiglitz, and M. Woodford, eds., Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps, Princeton: Princeton University Press.
Woodford, M. (2003), Interest and Prices, Princeton. Princeton University Press
Zeldes, S. (1989) Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence, Quarterly Journal of Economics, May 1989, 275-98..