Saving decisions under bounded and heterogeneous sophistication

J. Daniel Aromi

Revista de Economía Política de Buenos Aires, 2012, issue 11, 119-146

Abstract: We consider saving decisions in an economy where agents are characterized by heterogeneous levels of sophistication. In our simple setting, we are able to make a distinction between aspects of fundamental sophistication and strategic sophistication. The equilibrium of this economy is inefficient as sophisticated households do not offset the distortions that result from information and behavior of naive households. We show instances in which increments in the ability of sophisticated households to perceive more precise information results in less efficient outcomes. Additionally, we identify simple policy interventions that would increase welfare levels. Key Words: saving decisions, heterogeneity, sophistication.

Keywords: savings; savings decisions (search for similar items in EconPapers)
JEL-codes: D03 D84 D91 (search for similar items in EconPapers)
Date: 2012
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