Working Paper: NBER ID: w24767
Authors: Andreas Fuster; Ricardo Perez-Truglia; Mirko Wiederholt; Basit Zafar
Abstract: Information frictions play an important role in many theories of expectation formation. We use a survey experiment to generate direct evidence on how people select, acquire and process information. Participants can buy different information signals that could help them forecast future national home prices. We elicit their willingness to pay for information, and introduce exogenous variation in the cost of information. We find that participants put substantial value on their preferred signal and, when acquired, incorporate the signal in their beliefs. However, they disagree on which signal to buy. As a result, making information cheaper does not decrease the cross-sectional dispersion of expectations. We further document that numeracy and the revealed “taste” for accurate expectations are important correlates of heterogeneity in all stages of the process. We provide a model with costly acquisition and processing of information, which can match most of our empirical results.
Keywords: Expectations; Information Acquisition; Consumer Behavior
JEL Codes: C81; C93; D80; D83; D84; E27
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lowering the cost of information (D89) | Cross-sectional dispersion of expectations (D84) |
| More respondents acquire information when costs are lower (D16) | Dispersion across groups (C92) |
| Numeracy and revealed taste for accurate expectations (D84) | Heterogeneity across all stages of information processing (D83) |
| Lower prior uncertainty (D89) | Stronger belief updates in response to new information (D83) |