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Abstract

This paper studies the implications of information-processing limits on the consumption and savings behavior of households through time. It presents a dynamicmodel in which consumers rationally choose the size and scope of the information they want to process about their fi�nancial possibilities, constrained by a Shannonchannel. 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, numericalresults show that consumers with processing capacity constraints have asymmetric responses to shocks, with negative shocks producing more persistent effects thanpositive 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 onconsumers spending. The results are qualitatively consistent with the evidence ontax rebates 2001, 2008.



Item Type: MPRA Paper -

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

Language: English-

Keywords: Consumption, Rational Inattention, Dynamic programming-

Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and UncertaintyD - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and SavingD - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness-





Author: Tutino, Antonella

Source: https://mpra.ub.uni-muenchen.de/16744/







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