Information processing with recursive utility: some intriguing results

Frode Brevik () and Stefano d'Addona

University of St. Gallen Department of Economics working paper series 2007 from Department of Economics, University of St. Gallen

Abstract: We study information processing in a simple endowment economy where the mean consumption growth rate are governed by a hidden state variable and agents have recursive preferences. We show that for typical parameter values, there is a strong incentive to commit to ignoring future information on the state of the economy, but that such commitment raises time-inconsistency problems. We estimate the model on postwar US data and find that the representative consumer can achieve a utility gain equivalent to a 20% increase in lifetime consumption simply by not paying attention to the state of the economy.

Keywords: Recursive preferences; Epstein-Zin preferences; Uncertainty aversion; Information processing; Time inconsistency (search for similar items in EconPapers)
JEL-codes: D83 D84 E32 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2007-10
New Economics Papers: this item is included in nep-dge, nep-mac and nep-upt
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