Optimal attention and heterogeneous precautionary saving behavior

Penghui Yin

Journal of Economic Dynamics and Control, 2021, vol. 131, issue C

Abstract: This paper applies rational inattention theory proposed by Sims (2003) to study a puzzling empirical fact that wealthier individuals have a stronger precautionary saving motive. In the model, consumers face uninsured capital income risk but suffer from an information-processing capacity constraint. I solve for the optimal attention and consumption choices analytically in a Gaussian framework. I find that consumers with more initial wealth pay less attention to the capital income risk. As a result, wealthier consumers have higher perceived uncertainty about their future capital income and display a stronger precautionary motive by saving at higher rates.

Keywords: Consumption-saving decision; Information-processing constraint; Capital-income risk (search for similar items in EconPapers)
JEL-codes: D81 E13 E21 O16 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:131:y:2021:i:c:s0165188921001652

DOI: 10.1016/j.jedc.2021.104230

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