Expectations With Endogenous Information Acquisition: An Experimental Investigation
103 Pages Posted: 12 Jul 2018 Last revised: 18 Sep 2020
Date Written: March 1, 2019
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, Experiment, Housing, Information Frictions, Rational Inattention
JEL Classification: C81, C93, D80, D83, D84, E31, E58
Suggested Citation: Suggested Citation