Working Paper

Rationally Inattentive Consumer: An Experiment

Abstract: This paper presents a laboratory experiment that directly tests the theoretical predictions of consumption choices under rational inattention. Subjects are asked to select consumption when income is random. They can optimally decide to reduce uncertainty about income by acquiring signals about it. The informativeness of the signals directly relates to the cognitive effort required to process the information. We find that subjects? behavior is largely in line with the predictions of the theory: 1) Subjects optimally make stochastic consumption choices; 2) They respond to incentives and changes in the economic environment by varying their attention and consumption; 3) They respond asymmetrically to positive and negative shocks to income, with negative shocks triggering stronger and faster reactions than positive shocks.

Keywords: Rational Inattention; Experimental Evidence; Information Processing Capacity; Consumption;

JEL Classification: C91; D11; D8; E20;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2018-11-19

Number: 1813

Pages: 58 pages