In welfare theory it is standard to pick the consumption stream that maximizes the welfare of the representative agent. We argue against this position, and show that a benevolent social planner will generally place a greater weight on future consumption than does the representative agent. Our analysis has immediate implications for public policy: agents discount the future too much and the government should promote future oriented policies.

A model of endogenous price adjustment under money growth is presented. Firms follow (s,S) pricing policies, and price revisions are imperfectly synchronized. In the aggregate, price stickiness disappears, and money is neutral. The connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated. The results contrast with those obtained in models with exogenous fixed timing of price adjustment.

Prior research has established that consumption falls significantly at retirement. What is not known is the extent to which this fall is anticipated during the working years. Using data from a new survey, we show that many working households do expect a considerable fall in consumption when they retire. In fact, those who are already retired report significantly smaller falls in consumption than are expected by those who are still working.

ABSTRACT The “annuity puzzle,” conveying the apparently low interest of retirees in longevity insurance, is central to household finance. Two possible explanations are “public care aversion” (PCA), retiree aversion to simultaneously running out of wealth and being in need of long‐term care, and an intentional bequest motive. To disentangle the relative importance of PCA and bequest motive, we estimate a structural model of the retirement phase using a novel survey instrument that includes hypothetical questions. We identify PCA as very significant and find bequest motives that spread deep into the middle class. Our results highlight potential interest in annuities that make allowance for long‐term care expenses.

Many everyday decisions are made without full examination of all available options, and, as a result, the best available option may be missed. We develop a search-theoretic choice experiment to study the impact of incomplete consideration on the quality of choices. We find that many decisions can be understood using the satisficing model of Herbert Simon (1955): most subjects search sequentially, stopping when a “satisficing” level of reservation utility is realized. We find that reservation utilities and search order respond systematically to changes in the decision making environment. (JEL D03, D12, D83)

We unite two basic approaches to modelling limited attention in choice by showing that the rational inattention model implies the formation of consideration sets—only a subset of the available alternatives will be considered for choice. We provide necessary and sufficient conditions for rationally inattentive behaviour which allow the identification of consideration sets. In simple settings, chosen options are those that are best on a stand-alone basis. In richer settings, the consideration set can only be identified holistically. In addition to payoffs, prior beliefs impact consideration sets. Linear inequalities identify all priors consistent with each possible consideration set.

We introduce a simple method of recovering attention costs from choice data. Our method rests on a precise analogy with production theory. Costs of attention determine consumer demand and consumer welfare, just as a competitive firm’s technology determines its supply curve and profits. We implement our recovery method experimentally, outline applications, and link our work to the broader literature on inattention and mistaken decisions.

We introduce three new classes of attention cost functions: posterior separable, uniformly posterior separable, and invariant posterior separable. As with the Shannon cost function, all can be solved using Lagrangian methods. Uniformly posterior-separable cost functions capture many forms of sequential learning and hence play a key role in many applications. Invariant posterior-separable cost functions make learning strategies depend exclusively on payoff uncertainty. We introduce two behavioral axioms, Locally Invariant Posteriors and Only Payoffs Matter, which identify posterior-separable functions as uniformly and invariant posterior separable, respectively. In combination, they pinpoint the Shannon cost function.

Abstract We introduce a survey instrument to measure earnings risk allowing for the possibility of quitting or being fired from the current job. We find these transitions to be the key drivers of subjective risk. A link with administrative data provides multiple credibility checks and reveals that subjective earnings risk varies systematically across the population. It is also many times smaller than traditional estimates even when conditioning richly on demographics and job history. We show that subjective earnings risk can help explain why many hold limited liquid assets.

The neurotransmitter dopamine is central to the emerging discipline of neuroeconomics; it is hypothesized to encode the difference between expected and realized rewards and thereby to mediate belief formation and choice. We develop the first formal test of this theory of dopaminergic function, based on a recent axiomatization by Caplin and Dean [2008A]. These tests are satisfied by neural activity in the nucleus accumbens, an area rich in dopamine receptors. We find evidence for separate positive and negative reward prediction error signals, suggesting that behavioral asymmetries in response to losses and gains may parallel asymmetries in nucleus accumbens activity.