Income Risks and Optimal Attention-Consumption Allocation

43 Pages Posted: 14 Aug 2020 Last revised: 28 Aug 2020

See all articles by Yulei Luo

Yulei Luo

University of Hong Kong

Penghui Yin

Goethe University Frankfurt

Date Written: June 2, 2020

Abstract

This paper studies how agents allocate their limited attention between capital income and labor income risks in a two-period consumption-saving model with recursive utility. Specifically, we examine how the optimal attention and consumption-saving decisions are affected by the key model elements including the attention and wealth endowments, the risk and time preferences, and the amount of income risks. We also find that the simple model can have the potential to explain the consumption responses to the income risks and the relative volatility of consumption to income observed in the U.S. economy. Finally, we find that the welfare losses due to limited attention are insignificant.

Keywords: Capital Income and Labor income Risks; Optimal Attention Allocation; Consumption and Saving Decisions

JEL Classification: C61; D83; E21.

Suggested Citation

Luo, Yulei and Yin, Penghui, Income Risks and Optimal Attention-Consumption Allocation (June 2, 2020). University of Hong Kong Faculty of Law Research Paper No. 2020/040, Available at SSRN: https://ssrn.com/abstract=3616745 or http://dx.doi.org/10.2139/ssrn.3616745

Yulei Luo

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, HK
China

Penghui Yin (Contact Author)

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

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