Economic Agents as Imperfect Problem Solvers

Rosen Valchev and Cosmin Ilut

No 1285, 2017 Meeting Papers from Society for Economic Dynamics

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.

Date: 2017
New Economics Papers: this item is included in nep-upt
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Working Paper: Economic Agents as Imperfect Problem Solvers (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1285

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