Income Risks and Optimal Attention-Consumption Allocation
43 Pages Posted: 14 Aug 2020 Last revised: 28 Aug 2020
Date Written: June 2, 2020
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: Suggested Citation