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Information processing with recursive utility: some intriguing results

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  • Frode Brevik
  • Stefano d'Addona

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.

Suggested Citation

  • Frode Brevik & Stefano d'Addona, 2007. "Information processing with recursive utility: some intriguing results," University of St. Gallen Department of Economics working paper series 2007 2007-40, Department of Economics, University of St. Gallen.
    • Handle: RePEc:usg:dp2007:2007-40
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/dp2007/DP-40-Br.pdf
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    References listed on IDEAS

    as
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    5. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Economic Risk," NBER Working Papers 12948, National Bureau of Economic Research, Inc.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Recursive preferences; Epstein-Zin preferences; Uncertainty aversion; Information processing; Time inconsistency;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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