Induced uncertainty, market price of risk, and the dynamics of consumption and wealth

• 成果类型: Article
• 署名作者: Luo, Yulei; Young, Eric R.
• 署名单位: University of Hong Kong; University of Virginia
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2016.01.003
• 发表日期: 2016
• 页码: 1-41
• 关键词: Robust control and filtering; optimal inattention; Induced uncertainty; Market prices of uncertainty; Consumption and income volatility

摘要

In this paper we examine the implications of model uncertainty or robustness (RB) for consumption and saving and the market price of uncertainty under limited information-processing capacity (rational inattention or RI). First, we show that RI by itself creates an additional demand for robustness that leads to higher induced uncertainty facing consumers. Second, if we allow capacity to be elastic, RB increases the optimal level of attention. Third, we explore how the induced uncertainty composed of (i) model uncertainty due to RB and (ii) state uncertainty due to RI, affects consumption and wealth dynamics, the market price of uncertainty, and the welfare losses due to incomplete information. We find that induced uncertainty can better explain the observed consumption-income volatility and market price of uncertainty low attention increases the effect of model misspecification. (C) 2016 Elsevier Inc. All rights reserved.