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.