International Journal of Business and Economics Volume 17, No. 1 June, 2018

Rational Ignorance in Long-run Risk Models

Stefano d'Addona

University of Roma Tre, Italy

Abstract

This paper documents an unpleasant feature of Epstein-Zin preferences in long-run risk models that are widespread in asset pricing: Agents with a preference for an early resolution of uncertainty achieve higher utility if they ignore information on the state of the business cycle.

Keywords：recursive preferences, Epstein-Zin preferences, uncertainty aversion, information processing, time inconsistency.

JEL Classifications：D83, D84, E32.

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