Two-stage Budgeting with Bounded Rationality

We construct a unifying theory of two-stage budgeting and bounded rationality with mental accounting features. Mental rational inattention induce behavioral wedges between first-stage second-stage expenditure budgets. Because reviewing one’s financial activities is cognitively costly, consumers might reassess only subset their spending budgets every period. Over- or under-spending affects future decisions. apply latent Bayesian inference to agent-level weekly data in order structurally estimate the degree which low-income appear rationally constrained respect budgeting. Our findings provide insight into how may respond interventions that encourage more disciplined behavior, like push notifications apps. If are acutely aware budget misses, they adjust upward avoid dis-utility over-expenditure, driving savings rates balances downward. In this manner, warn about thresholds could backfire actually lead behavior reduces wealth long-run.