The More You Know? – Consumption Behavior and the Communication of Economic Information

This paper uses a laboratory experiment to analyze the impact of different types of information on consumption and savings behavior. Based on a buffer stock savings model, three treatment dimensions are used: The amount of information subjects receive about the likelihood of income shocks, whether subjects are informed about other people's beliefs about these shocks, and the framing of shocks. The results reveal that – even with little information about the random term determining the income shock – consumption decisions are surprisingly close to the optimal consumption path. If at all, more information rather worsens than improves consumption behavior. Nevertheless, in line with the theoretical prediction, observed behavior is robust to the framing and other people's beliefs about income shocks. Given that actual decisions are significantly correlated with the optimal consumption amount (and not with easier accessible variables like cash-on-hand) suggests that subjects do not simply use naive heuristics to determine their consumption.