Information Processing with Recursive Utility: Some Intriguing Results

University of St. Gallen, Department of Economics Discussion Paper No. 2007-40

20 Pages Posted: 23 Nov 2007

See all articles by Stefano d'Addona

Stefano d'Addona

University of Roma Tre

Frode Brevik

University of St. Gallen - SEPS: Economics and Political Sciences

Date Written: October 2007

Abstract

We study information processing in a simple endowment economy where the mean consumption growth rate are governed by a hidden state variable and agents have recursive preferences. We show that for typical parameter values, there is a strong incentive to commit to ignoring future information on the state of the economy, but that such commitment raises time - inconsistency problems. We estimate the model on postwar US data and find that the representative consumer can achieve a utility gain equivalent to a 20% increase in lifetime consumption simply by not paying attention to the state of the economy.

Keywords: Recursive preferences, Epstein-Zin preferences, Uncertainty aversion, Information processing, Time inconsistency

JEL Classification: D83, D84, E32

Suggested Citation

d'Addona, Stefano and Brevik, Frode, Information Processing with Recursive Utility: Some Intriguing Results (October 2007). University of St. Gallen, Department of Economics Discussion Paper No. 2007-40, Available at SSRN: https://ssrn.com/abstract=1031854 or http://dx.doi.org/10.2139/ssrn.1031854

Stefano D'Addona

University of Roma Tre ( email )

Via Chiabrera, 199
Rome, 00145
Italy

Frode Brevik (Contact Author)

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

Rosenbergstrasse 51
St. Gallen, St. Gallen CH-9000
Switzerland