Risk Exposure and Acquisition of Macroeconomic Information
Many people are uncertain about their own exposure to risks such as recessions (e.g., unemployment). This might lead them to obtain information in the wrong places and make poor economic decisions. Policymakers can provide individuals with information on their exposure to such risks, which may help to direct people’s attention to relevant pieces of news, such as economic forecasts.
Key Issue
Attention to macroeconomic news influences individuals’ expectations about future economic conditions, and through this channel should affect their decisions about spending, investment or labor market behavior. It is therefore of key interest to both researchers and policymakers to understand under which circumstances individuals pay attention—a scarce resource—to different pieces of macroeconomic information. In this paper, we shed light on one key factor that should matter for the demand for macroeconomic information according to theories of rational attention allocation: individuals’ exposure to job loss risk during recessions. A higher perceived exposure should increase the expected benefits of acquiring information about general economic conditions, and thereby increase individuals’ demand for such information.
Approach and Methodology
We test this prediction in the context of a survey experiment with a representative sample of US individuals. We provide respondents with information on the fraction of people in their demographic group who lost their job during the Great Recession. The information is based either on the American Community Survey or based on the Current Population Survey, which differ due to procedural details and sampling variation. This allows us to provide otherwise similar individuals with differential information on their group’s exposure to the Great Recession. We then elicit our respondents’ beliefs about the likelihood that they could become unemployed during the next recession. Finally, participants choose between receiving one expert forecast (on inflation, government spending, interest rates or the likelihood of a recession) or receiving no forecast.
Key Findings and Conclusions
Individuals who learn of a higher unemployment risk to their demographic group during recessions strongly revise their perceived likelihood of becoming personally unemployed during the next recession in the US. Moreover, they significantly increase their demand for the expert forecast about the likelihood of a recession.
Our findings are in line with macroeconomic models of rational inattention, according to which the demand for information is determined by its expected costs and benefits. Moreover, the fact that individuals’ own perceived exposure changes in response to information suggests a potential for policymakers to help individuals allocate their attention optimally through information provision. This, in turn, could help households make better economic decisions.
Authors
Publication
Risk Exposure and Acquisition of Macroeconomic Information
CESifo, Munich, 2020
CESifo Working Paper No. 8634