Durable Consumption and Asset Management With Transaction and Observation Costs
Source: University of Chicago
The empirical evidence on rational inattention lags far behind the theoretical developments: micro evidence on the most immediate consequence of observation costs − the infrequent observation of state variables − is not available in standard datasets. This paper contribute to filling the gap with two novel household surveys that record the frequency with which investors observe the value of their financial investments, as well as the frequency with which they trade in financial assets and durable goods. This paper use these data to test some predictions of existing models and show that to match the patterns in the data the authors need to modify these models by shifting the focus from non-durable to durable consumption.