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Events of Department of Economics

November 22, 2018 at 12:30
Meeting Room 5.e4.sr04 - Via Roentgen 1

Seminar (Joint with the BAFFI CAREFIN)

Expectations with Endogenous Information Acquisition: An Experimental Investigation

Andreas Fuster (Swiss National Bank)

 
Abstract

Information frictions play an important role in many theories of expectation formation and macroeconomic fluctuations. We use a survey experiment to generate direct evidence on how people acquire and process information, in the context of national home price expectations. Participants can buy different pieces of information that could be relevant for the formation of their expectations about the future median national home price. We use an incentive-compatible mechanism to elicit their maximum willingness to pay. We also introduce exogenous variation in the value of information by randomly assigning individuals to rewards for the ex-post accuracy of their expectations. Consistent with rational inattention, individuals are willing to pay more for information when they stand to gain more from it. However, underscoring the importance of limits on information processing capacity, individuals disagree on which signal they prefer to buy. Individuals with lower education and numeracy are less likely to demand information that has ex-ante higher predictive power. As a result of the disagreement, lowering the information acquisition cost does not decrease the cross-sectional dispersion of expectations. We show that a model with rational inattention and heterogeneous prior beliefs about information sources can match almost all of our empirical results. Our findings also have implications for the design of information interventions.