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A "quantum" approach to rational inattention

  • Saint-Paul, Gilles

In this paper, I propose a model of rational inattention where the choice variable is a deterministic function of the exogenous variables, and still only a finite amount of information is being used. This holds provided the choice variable is discrete rather than continuous; that is, the mapping from the realization of the exogenous variables to the endogenous ones is piece-wise constant. Thus, limited information is now a source of lumpiness in behavior, rather than a source of noise. A central result is that the mutual information between the exogenous variable and the endogenous one is simply equal to the entropy, in the usual discrete sense, of the endogenous variable. The approach is illustrated with two applications: a general linear-quadratic problem with a uniform distribution, and a simple static model of price-setting where individual price setters face aggregate monetary shocks and idiosyncratic productivity shocks.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7739.

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Date of creation: Mar 2010
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Handle: RePEc:cpr:ceprdp:7739
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  1. Sergio Rebelo & Nir Jaimovich & Martin Eichenbaum, 2010. "Reference Prices and Nominal Rigidities," 2010 Meeting Papers 1049, Society for Economic Dynamics.
  2. Moscarini, Giuseppe, 2004. "Limited information capacity as a source of inertia," Journal of Economic Dynamics and Control, Elsevier, vol. 28(10), pages 2003-2035, September.
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  11. Luigi Paciello, 2008. "The Response of Prices to Technology and Monetary Policy Shocks under Rational Inattention," EIEF Working Papers Series 0816, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2007.
  12. Caballero, Ricardo J & Engel, Eduardo M R A & Haltiwanger, John, 1997. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," American Economic Review, American Economic Association, vol. 87(1), pages 115-37, March.
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  14. Filip Matejka, 2010. "Rigid Pricing and Rationally Inattentive Consumer," CERGE-EI Working Papers wp409, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  15. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  16. Martin L. Weitzman, 1984. "The Simple Macroeconomics of Profit Sharing," Working papers 357, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 171-192, Spring.
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