Optimal Saving and the Timing of the Resolution of Uncertainty in Capital Return

35 Pages Posted: 11 Jul 2019 Last revised: 3 May 2022

Date Written: May 1, 2019

Abstract

What is the effect of the optimal information acquisition at date t+1 regarding the uncertainty at date t+2 on the saving behavior date t? This paper explores how agents choose the timing of uncertainty resolution and its effect on ex ante consumption-saving decisions. Under rational inattention, agents can optimally decide the information acquisition regarding future capital return, or the timing of uncertainty resolution. We find that, for relative risk aversion degree larger than unity, (i) households with higher initial endowment prefer to have later resolution of uncertainty in future capital return, and (ii) they save at a higher rate due to prudence. We also provide empirical evidence from Michigan Survey of Consumers (MSC) to support these model results.

Keywords: consumption-savings decision; information-processing constraint; capital risk

JEL Classification: D81; D91; E21; O16

Suggested Citation

Yin, Penghui, Optimal Saving and the Timing of the Resolution of Uncertainty in Capital Return (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=3417561 or http://dx.doi.org/10.2139/ssrn.3417561

Penghui Yin (Contact Author)

Shandong University ( email )

Shandanalu 27
Jinan, Shandong 250100
China

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