Some Aggregate Effects of Heterogeneity in Information Processing

Uri M Possen and Mikko Puhakka

Bulletin of Economic Research, 1997, vol. 49, issue 3, 231-52

Abstract: This paper analyzes the equilibrium of an economy where economic agents differ with respect to their information gathering and processing abilities. Our results depend on the magnitude of the relative risk aversion. We show that the unsophisticated (with respect to their information processing abilities) agents are disproportionately important in the cases of both large and small risk aversion. In the case of the relative risk aversion measure being greater than unity volatility of aggregate consumption is reduced. This supports the view that observed consumption in many countries fluctuates less than predicted by models with fully rational agents only. Copyright 1997 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Date: 1997
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