Questions for lecture on Limited Attention 1) Can you briefly describe why limited attention is generally relevant for explaining economic behavior? 2) Why limited attention is an important element to take into account for taxation? 3) Describe the main feature of the experiment performed by Chetty et al. 2009 on the effect of salience of the taxation. 4) Why considering the tax on alcohol in the US represent a good natural experiment to assess the effect of limited attention on consumer behavior and can you briefly describe their results? 5) Can you briefly describe how Lacetra et al, 2012 estimate the effect of limited attention on the car market? 6) Can you describe their main results? 7) Are also experienced agent subject to limited attention? Sketch of the answers: 1) The value of a good is often determined by a visible and an opaque component, the extend to which a consumer take the last into account change the value of the good. 2) Taxation is often not very transparent and can represent the opaque
component of a good’s value. For example taxes exclude from the prices at the
shelves but added at the till. 3) They compared the same store before and after the treatment, and the store where the treatment was applied with the control stores. Making the taxation explicit resulted into a drop of 8% in the demand. 4) There usually are two taxes, one included in the prices the other levied at the register. These taxes changes within years and within states. Using this variances they estimated the different effect of the two taxes. The variation of the tax included in the prices has a much stronger effect than the one not included in the original price. 5) They used the 10K digit in the odometers, and test the hypothesis that Car buyers pay attention only to 10K digits (especially the threshold of 10K is important). 6) There is a clear effect on the prices of the second-­‐‑hand cars sold, they drop more between 10K digits, but also between 1K digits for car with less than 10K miles. 7) Evidences among experienced car dealers show awareness of this bias. However there are pervasive effects of limited attention in the financial market usually operated by experienced investors.