The empirical evidence on rational inattention lags the theoretical developments: micro evidence on one of the most immediate consequences of observation costs—the infrequent observation of state variables—is not available in standard datasets. We contribute to filling the
gap using new household surveys. To match these data we modify existing models, shifting the focus from nondurable to durable consumption. The model features both observation and transaction costs and implies a mixture of timedependent and state-dependent rules. Numerical simulations explain
the frequencies of trading and observation of the median investor with small observation costs and larger transaction costs.
The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.