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Dynamic discrete choice under rational inattention

Author

Listed:
  • Jianjun Miao

    (Boston University)

  • Hao Xing

    (Boston University)

Abstract

We adopt the posterior-based approach to study dynamic discrete choice problems under rational inattention. We provide necessary and sufficient conditions to characterize the solution for general uniformly posterior-separable cost functions. We propose an efficient algorithm to solve these conditions and apply our model to explain phenomena such as perceptual distance, status quo bias, confirmation bias, and belief polarization. A key condition for our approach to work is the concavity of the difference between the generalized entropy of the current posterior and the discounted generalized entropy of the prior beliefs about the future states.

Suggested Citation

  • Jianjun Miao & Hao Xing, 2024. "Dynamic discrete choice under rational inattention," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 77(3), pages 597-652, May.
    • Handle: RePEc:spr:joecth:v:77:y:2024:i:3:d:10.1007_s00199-023-01512-1
    DOI: 10.1007/s00199-023-01512-1
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    More about this item

    Keywords

    Rational inattention; Endogenous information acquisition; Entropy; Dynamic discrete choice; Dynamic programming;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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