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
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: Suggested Citation
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