Working Paper: CEPR ID: DP16667
Authors: Tobias Broer; Alexandre Kohlhas; Kurt Mitman; Kathrin Schlafmann
Abstract: Solutions to macroeconomic models with wealth inequality and aggregate shocks often rely on the assumption of limited but common information among households. We show that this assumption is inconsistent with rational information choice for plausible information costs. To do so, we embed information choice into the workhorse heterogeneous-agent model with aggregate risk (Krusell and Smith, 1998). First, we demonstrate that the benefits of acquiring more precise information about the state of the economy depend crucially on household wealth. Second, we show that such heterogeneous incentives to acquire information combine with the strategic substitutability of savings choices to imply that equilibria in which households acquire the same information do not exist for plausible information costs. Finally, we document that a representative-agent equilibrium may not exist even in the absence of exogenous sources of wealth heterogeneity.
Keywords: Expectations; Heterogeneity; Information
JEL Codes: C53; D83; E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wealth (D14) | information acquisition (D83) |
| information acquisition (D83) | savings decisions (D14) |
| wealth (D14) | benefits of information acquisition (D83) |
| information acquisition (D83) | symmetric-information equilibria (D82) |