Rationality of limited rationality: some aggregate implications

Uri M. Possen and Mikko Puhakka
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Uri M. Possen: Department of Economics, Cornell University, USA
Mikko Puhakka: Department of Economics, University of Lapland, Finland

Finnish Economic Papers, 1994, vol. 7, issue 2, 83-93

Abstract: In this paper we let economic agents choose whether to become fully rational or stay boundedly rational. Boundedly rational agents are less sophisticated in their information processing abilities. It is costly to acquire information needed to become fully rational, and thus not all agents are willing to incur those costs. We then explore the aggregate effects of endogenizing the decision whether the agent should or should not become fully rational in handling information. Since fully and boundedly rational individuals make different saving and consumption decisions, their interaction has a direct impact on the size of capital stock, aggregate savings and the volatility of output. E.g. we are able to show that in many circumstances our model will imply a smoother consumption than would be observed in a model with only fully rational Consumers.

JEL-codes: D81 E21 E22 (search for similar items in EconPapers)
Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:fep:journl:v:7:y:1994:i:2:p:83-93

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