Information processing with recursive utility: some intriguing results

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.