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American Economic Review: Vol. 102 No. 5 (August 2012)

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Durable Consumption and Asset Management with Transaction and Observation Costs

Article Citation

Alvarez, Fernando, Luigi Guiso, and Francesco Lippi. 2012. "Durable Consumption and Asset Management with Transaction and Observation Costs." American Economic Review, 102(5): 2272-2300.

DOI: 10.1257/aer.102.5.2272

Abstract

The empirical evidence on rational inattention lags the theoretical developments: micro evidence on one of the most immediate consequences of observation costs—the infrequent observation of state variables—is not available in standard datasets. We contribute to filling the gap using new household surveys. To match these data we modify existing models, shifting the focus from nondurable to durable consumption. The model features both observation and transaction costs and implies a mixture of time-dependent and state-dependent rules. Numerical simulations explain the frequencies of trading and observation of the median investor with small observation costs and larger transaction costs. (JEL D12, D14, E21, G11)

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Authors

Alvarez, Fernando (U Chicago)
Guiso, Luigi (Einaudi Institute for Economics and Finance, Rome)
Lippi, Francesco (U Sassari and Einaudi Institute for Economics and Finance, Rome)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
D14: Personal Finance
E21: Macroeconomics: Consumption; Saving; Wealth
G11: Portfolio Choice; Investment Decisions


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