Optimal Amount of Attention to Capital Income Risk and Heterogeneous Precautionary Saving Behavior

This paper studies heterogeneous precautionary saving behavior under rational inattention. In the model, consumers face uninsured capital income risk, have CRRA preferences, and suffer from an information-processing capacity constraint. For given attention devoted to capital income risk, I solve for the optimal consumption-saving choices and show that the expected utility from consumption is increasing with the amount of attention. Furthermore, I solve for the optimal attention choice and find that households with more initial wealth would pay less attention to capital income risk. As a result, wealthier households have higher perceived uncertainty in their future capital income and display precautionary motive by saving at higher rates. I also provide empirical evidence to support these results by using data from 2016 wave of the Survey of Consumer Finances.