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Geometric Rational Inattention

Author

Listed:
  • Roc Armenter

    (Federal Reserve Bank of Philadelphia)

  • Michele Muller-Itten

    (University of Notre Dame)

  • Zachary Stangebye

    (University of Notre Dame)

Abstract

We demonstrate that a wide class of Rational Inattention (RI) problems can be re-cast as a set of geometric orthogonality conditions. This approach allows us to separate the role of information costs and payoffs from that of prior beliefs. It also allows us to characterize the optimal conditional choice by what we call the ignorance equivalent action (IEA) of a menu. We use the IEA to derive novel comparative statics for changes in the menu. Finally, it serves as the foundation for our new, highly efficient numerical algorithm for the solution of these models: Our algorithm provides accurate solutions orders of magnitudes faster than current techniques.

Suggested Citation

  • Roc Armenter & Michele Muller-Itten & Zachary Stangebye, 2019. "Geometric Rational Inattention," 2019 Meeting Papers 1062, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1062
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    References listed on IDEAS

    as
    1. Emir Kamenica & Matthew Gentzkow, 2011. "Bayesian Persuasion," American Economic Review, American Economic Association, vol. 101(6), pages 2590-2615, October.
    2. Filip Matêjka & Alisdair McKay, 2015. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," American Economic Review, American Economic Association, vol. 105(1), pages 272-298, January.
    3. Matthew Gentzkow & Emir Kamenica, 2014. "Costly Persuasion," American Economic Review, American Economic Association, vol. 104(5), pages 457-462, May.
    4. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
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