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Article: Risk-sensitive Consumption and Savings under Rational Inattention

TitleRisk-sensitive Consumption and Savings under Rational Inattention
Authors
Issue Date2010
PublisherAmerican Economic Association. The Journal's web site is located at http://www.aeaweb.org/aej-macro/index.php
Citation
American Economic Journal: Macroeconomics, 2010, v. 2 n. 4, p. 281-325 How to Cite?
AbstractThis paper studies the consumption-savings behavior of households who have risk-sensitive preferences and suffer from limited information-processing capacity (rational inattention or RI). We first solve the model explicitly and show that RI increases precautionary savings by interacting with income uncertainty and risk sensitivity. Given the closed-form solutions, we find that the RI model displays a wide range of observational equivalence properties, implying that consumption and savings data cannot distinguish between risk sensitivity, robustness, or the discount factor, in any combination. We then show that the welfare costs from RI are larger for risk-sensitive households than any other observationally-equivalent settings. (JEL D11, D81, D82, E13, E21)
Persistent Identifierhttp://hdl.handle.net/10722/207586
ISSN
2015 Impact Factor: 2.567
2015 SCImago Journal Rankings: 6.017

 

DC FieldValueLanguage
dc.contributor.authorLuo, Y-
dc.contributor.authorYoung, ER-
dc.date.accessioned2015-01-09T06:14:22Z-
dc.date.available2015-01-09T06:14:22Z-
dc.date.issued2010-
dc.identifier.citationAmerican Economic Journal: Macroeconomics, 2010, v. 2 n. 4, p. 281-325-
dc.identifier.issn1945-7707-
dc.identifier.urihttp://hdl.handle.net/10722/207586-
dc.description.abstractThis paper studies the consumption-savings behavior of households who have risk-sensitive preferences and suffer from limited information-processing capacity (rational inattention or RI). We first solve the model explicitly and show that RI increases precautionary savings by interacting with income uncertainty and risk sensitivity. Given the closed-form solutions, we find that the RI model displays a wide range of observational equivalence properties, implying that consumption and savings data cannot distinguish between risk sensitivity, robustness, or the discount factor, in any combination. We then show that the welfare costs from RI are larger for risk-sensitive households than any other observationally-equivalent settings. (JEL D11, D81, D82, E13, E21)-
dc.languageeng-
dc.publisherAmerican Economic Association. The Journal's web site is located at http://www.aeaweb.org/aej-macro/index.php-
dc.relation.ispartofAmerican Economic Journal: Macroeconomics-
dc.rightsAmerican Economic Journal: Macroeconomics. Copyright © American Economic Association.-
dc.titleRisk-sensitive Consumption and Savings under Rational Inattentionen_US
dc.typeArticleen_US
dc.identifier.emailLuo, Y: yluo@econ.hku.hk-
dc.identifier.doi10.1257/mac.2.4.281-
dc.identifier.hkuros170294-
dc.identifier.volume2-
dc.identifier.issue4-
dc.identifier.spage281-
dc.identifier.epage325-
dc.publisher.placeUnited States-

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