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

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