Myopia and Anchoring
We develop an equivalence between the equilibrium effects of incomplete information and those of two behavioral distortions: myopia, or extra discounting of the future; and anchoring of current behavior to past behavior, as in models with habit persistence or adjustment costs. We show how these dist...
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| Published in: | The American economic review Vol. 111; no. 4; pp. 1166 - 1200 |
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| Main Authors: | , |
| Format: | Journal Article |
| Language: | English |
| Published: |
American Economic Association
01-04-2021
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| Online Access: | Get full text |
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| Summary: | We develop an equivalence between the equilibrium effects of incomplete information and those of two behavioral distortions: myopia, or extra discounting of the future; and anchoring of current behavior to past behavior, as in models with habit persistence or adjustment costs. We show how these distortions depend on higher-order beliefs and GE mechanisms, and how they can be disciplined by evidence on expectations. We finally illustrate the use of our toolbox with a quantitative application in the context of inflation, a bridge to the HANK literature, and an extension to networks. |
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| ISSN: | 0002-8282 1944-7981 |
| DOI: | 10.1257/aer.20191436 |