Optimal Amount of Attention to Capital Income Risk and Heterogeneous Precautionary Saving Behavior

Penghui Yin

No 7413, CESifo Working Paper Series from CESifo

Abstract: This paper studies heterogeneous precautionary saving behavior under rational inattention. In the model, consumers face uninsured capital income risk, have CRRA preferences, and suffer from an information-processing capacity constraint. For given attention devoted to capital income risk, I solve for the optimal consumption-saving choices and show that the expected utility from consumption is increasing with the amount of attention. Furthermore, I solve for the optimal attention choice and find that households with more initial wealth would pay less attention to capital income risk. As a result, wealthier households have higher perceived uncertainty in their future capital income and display precautionary motive by saving at higher rates. I also provide empirical evidence to support these results by using data from 2016 wave of the Survey of Consumer Finances.

Keywords: consumption-saving decision; information-processing constraint; capital-income risk (search for similar items in EconPapers)
JEL-codes: D81 E13 E21 O16 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-mac and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7413

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