Working Paper: NBER ID: w10883
Authors: Ricardo Reis
Abstract: This paper studies the consumption decisions of agents who face costs of acquiring, absorbing and processing information. These consumers rationally choose to only sporadically update their information and re-compute their optimal consumption plans. In between updating dates, they remain inattentive. This behavior implies that news disperses slowly throughout the population, so events have a gradual and delayed effect on aggregate consumption. The model predicts that aggregate consumption adjusts slowly to shocks, and is able to explain the excess sensitivity and excess smoothness puzzles. In addition, individual consumption is sensitive to ordinary and unexpected past news, but it is not sensitive to extraordinary or predictable events. The model further predicts that some people rationally choose to not plan, live hand-to-mouth, and save less, while other people sporadically update their plans. The longer are these plans, the more they save. Evidence using U.S. aggregate and microeconomic data generally supports these predictions.
Keywords: Inattentive Consumers; Consumption Decisions; Information Costs
JEL Codes: E21; D9; D1; D8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inattentiveness (D91) | Slow information dissemination (D83) |
| Slow information dissemination (D83) | Gradual adjustment of aggregate consumption to shocks (D15) |
| Inattentiveness (D91) | Gradual adjustment of aggregate consumption to shocks (D15) |
| Inattentiveness (D91) | Sensitivity to past income shocks (H31) |
| Inattentiveness (D91) | Less saving due to hand-to-mouth living (E21) |
| Inattentiveness (D91) | Delayed effect on aggregate consumption following economic shocks (E21) |
| Inattentiveness (D91) | Infrequent updating of consumption plans (D15) |
| Inattentiveness (D91) | Consumption not sensitive to predictable extraordinary events (D11) |