Cognitive constraints and economic incentives

Francesco D'Acunto, Daniel Hoang, Maritta Paloviita and Michael Weber

No 9/2023, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: Unique administrative data on a representative population's cognitive abilities, spending, and financials reveal that consumers at or below median cognitive abilities barely react when their incentives to spend or borrow change, even if they earn high incomes and are financially unconstrained and conditional on formal education, personal and macroeconomic expectations, and rich demographics. Matched survey-based data on this population show that non-responsive consumers fail to grasp how the incentives to consume, save, and borrow change over time. Cognitive constraints limit the effectiveness of policies targeting household consumption and debt and might lead to regressive redistribution from low- to high-cognitive-ability consumers.

Keywords: Behavioral Economics; Limited Cognition; Consumption; Borrowing; Heterogeneous Agents; Redistribution; Inequality (search for similar items in EconPapers)
JEL-codes: D12 D91 E21 E52 G41 G51 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cbe, nep-mac and nep-neu
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:92023

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