Information processing with recursive utility: some intriguing results
Series
VWA Working Paper
Type
working paper
Date Issued
2007
Author(s)
Brevik, Frode
Abstract
Much of the recent research in Macroeconomics and Finance uses
models where the representative agent has a recursive utility function. We study information processing with such preferences in a
simple endowment economy where consumption growth rates are autocorrelated. We show that for typical parameter values, positively
correlated consumption growth rates introduce a strong incentive for
ignoring information on the current state of the economy. We esti-
mate the model on postwar US data and find that the representative
consumer can achieve a utility gain equivalent to a 20 % increase in
lifetime consumption simply by not paying attention to the state of
the economy.
models where the representative agent has a recursive utility function. We study information processing with such preferences in a
simple endowment economy where consumption growth rates are autocorrelated. We show that for typical parameter values, positively
correlated consumption growth rates introduce a strong incentive for
ignoring information on the current state of the economy. We esti-
mate the model on postwar US data and find that the representative
consumer can achieve a utility gain equivalent to a 20 % increase in
lifetime consumption simply by not paying attention to the state of
the economy.
Language
English
Keywords
Recursive preferences
Epstein-Zin preferences
Uncertainty aversion
Information processing
Time inconsistency
HSG Classification
contribution to scientific community
Refereed
No
Publisher
VWA
Number
2007-40
Subject(s)
Division(s)
Eprints ID
41465