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The rigidity of choice: Lifecycle savings with information-processing limits

Antonella Tutino ()

No 2008-62, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper studies the implications of information-processing limits on the consumption and savings behavior of households through time. It presents a dynamic model in which consumers rationally choose the size and scope of the information they want to process concerning their financial possibilities, constrained by a Shannon channel. The model predicts that people with higher degrees of risk aversion rationally choose more information. This happens for precautionary reasons since, with finite processing rate, risk averse consumers prefer to be well informed about their financial possibilities before implementing a consumption plan. Moreover, numerical results show that consumers with processing capacity constraints have asymmetric responses to shocks, with negative shocks producing more persistent effects than positive ones. This asymmetry results in more savings. I show that the predictions of the model can be effectively used to study the impact of tax reforms on consumers spending.

Keywords: Consumer behavior; Saving and investment; Consumption (Economics) (search for similar items in EconPapers)
Date: 2008, Revised 2008
New Economics Papers: this item is included in nep-dge, nep-mac and nep-upt
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