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Journal Article
'Rational inattention' guides overloaded brains, helps economists understand market behavior
Between Internet news sources, social media and email, people are awash in information, most of it accessible at near-zero cost. Yet, humans possess only a finite capacity to process all of it. The average email user, for example, receives dozens of messages per day. The messages can?t all receive equal attention. How carefully does someone read an email from a sibling or friend before crafting a reply? How closely does a person read an email from the boss?> ; Limitations on the ability to process information force people to make choices regarding the subjects to which they pay more or less ...
Marrying for Money Ends Up Reducing Income Inequality
The marriage market constitutes a way to ameliorate income inequality in the U.S. and to create bridges across the income ladder.
Working Paper
The rigidity of choice: Lifecycle savings with information-processing limits
This paper studies the implications of information-processing limits on the consumption and savings behavior of households through time. It presents a dynamic model in which consumers rationally choose the size and scope of the information they want to process concerning their financial possibilities, constrained by a Shannon channel. The model predicts that people with higher degrees of risk aversion rationally choose more information. This happens for precautionary reasons since, with finite processing rate, risk averse consumers prefer to be well informed about their financial ...
Working Paper
Rationally Inattentive Savers and Monetary Policy Changes: A Laboratory Experiment
We present a model where rationally inattentive agents decide how much to save while imperfectly tracking interest rate changes. Suitable assumptions on agents’ preferences and interest rate distribution allow us to derive testable theoretical predictions and their implications for monetary policy. We probe these predictions using a laboratory experiment with induced inattention that closely reflects the theoretical assumptions. We find that, empirically, the laboratory data corroborates the results of the theoretical model. In particular, we show that experimental subjects respond to ...
Journal Article
Inflation is not always and everywhere a monetary phenomenon
Fiscal policy is as significant as, and sometimes more important than, monetary policy in determining the price level and, therefore, the dynamics of inflation.
Calibrating central bank inflation messages is key to policy success
A well-crafted message about the current and future state of the economy can influence the private sector’s expectations and guide behavior to ensure that the economy remains strong and prices stable even amid threatening supply-and-demand shocks.
Working Paper
Targeted Search in Matching Markets
We propose a parsimonious matching model where a person's choice of whom to meet endogenizes the degree of randomness in matching. The analysis highlights the interaction between a productive motive, driven by the surplus attainable in a match, and a strategic motive, driven by reciprocity of interest of potential matches. We find that the interaction between these two motives differs with preferences?vertical versus horizontal?and that this interaction implies that preferences recovered using our model can look markedly different from those recovered using a model where the degree of ...
Journal Article
Consumers Respond More to Negative News than Positive Info
Consumers, forced to navigate a constant stream of economic information, are often challenged to sort through details and respond to new material. Experiments suggest that people react more forcefully to negative income shocks than to positive ones. Size also matters: Reaction to small shocks is slower relative to the response to big shocks participation-rate decline.
Economics of Love: Rejection Worth Chance at Dream Date
With the advance of social networks and increasing prevalence of online dating, the question of how men and women match up has gained importance in economics and society.
Working Paper
Rationally inattentive macroeconomic wedges
This paper argues that the solution to a dynamic optimization problem of consumption and labor under finite information-processing capacity can simultaneously explain the intertemporal and intratemporal labor wedges. It presents a partial equilibrium model, where a representative risk adverse consumer chooses information about wealth with limited attention. The paper compares ex-post realizations of models with finite and infinite capacity. The model produces macroeconomic wedges and measures of elasticity consistent with the literature. These findings suggest that a consumption-labor model ...