Optimal attention and heterogeneous precautionary saving behavior

This paper applies rational inattention theory proposed by Sims (2003) to study a puzzling empirical fact that wealthier individuals have a stronger precautionary saving motive. In the model, consumers face uninsured capital income risk but suffer from an information-processing capacity constraint. I solve for the optimal attention and consumption choices analytically in a Gaussian framework. I find that consumers with more initial wealth pay less attention to the capital income risk. As a result, wealthier consumers have higher perceived uncertainty about their future capital income and display a stronger precautionary motive by saving at higher rates.