Inattentive Consumers

Princeton Discussion Papers in Economics Paper No. 232

54 Pages Posted: 3 Jan 2005

See all articles by Ricardo Reis

Ricardo Reis

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2004

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 thataggregate 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.

JEL Classification: E2, D9, D1, D8

Suggested Citation

Reis, Ricardo A.M.R., Inattentive Consumers (October 2004). Princeton Discussion Papers in Economics Paper No. 232, Available at SSRN: https://ssrn.com/abstract=639042 or http://dx.doi.org/10.2139/ssrn.639042

Ricardo A.M.R. Reis (Contact Author)

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