May 28th, 2019
"Expectations with Endogenous Information Acquisition: An Experimental Investigation"
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. Participants can buy different information signals that could help them forecast the future median national home price. We use an incentive-compatible mechanism to elicit their willingness to pay for information, and introduce exogenous variation in the rewards for ex-post forecast accuracy. We find that participants put higher value on their preferred signal when rewards are higher, and incorporate the signal in their beliefs if they obtain it. However, they disagree on which signal to buy, and as a result, making information cheaper does not decrease the cross-sectional dispersion of expectations. We further document that numeracy and the revealed “taste” for accurate expectations are important correlates of heterogeneity in all stages of the expectation formation process. We provide a model with costly acquisition and processing of information, and show that it can match almost all of our empirical results. Our findings also have implications for the design of information interventions.