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Rational Inattention and Sequential Information Sampling

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  • Benjamin Hébert
  • Michael Woodford

Abstract

We propose a new principle for measuring the cost of information structures in rational inattention problems, based on the cost of generating the information used to make a decision through a dynamic evidence accumulation process. We introduce a continuous-time model of sequential information sampling, and show that, in a broad class of cases, the choice frequencies resulting from optimal information accumulation are the same as those implied by a static rational inattention problem with a particular static information-cost function. Among the static cost functions that can be justified in this way is the mutual information cost function proposed by Sims (2010), but we show that other cost functions can be micro-founded in this way as well. In particular, we introduce a class of “neighborhood-based” cost functions, which make it more costly to undertake experiments that can produce different results in similar states, and show that the predictions of this alternative rational inattention theory better conform with evidence from perceptual discrimination experiments.

Suggested Citation

  • Benjamin Hébert & Michael Woodford, 2017. "Rational Inattention and Sequential Information Sampling," NBER Working Papers 23787, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23787
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    References listed on IDEAS

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    1. Jakub Steiner & Colin Stewart & Filip Matějka, 2017. "Rational Inattention Dynamics: Inertia and Delay in Decision‐Making," Econometrica, Econometric Society, vol. 85, pages 521-553, March.
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    3. 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.
    4. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275R, Cowles Foundation for Research in Economics, Yale University, revised Aug 2001.
    5. Michael Woodford, 2014. "An Optimizing Neuroeconomic Model of Discrete Choice," NBER Working Papers 19897, National Bureau of Economic Research, Inc.
    6. Yang, Ming, 2015. "Coordination with flexible information acquisition," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 721-738.
    7. Andrew Caplin & Mark Dean & John Leahy, 2017. "Rationally Inattentive Behavior: Characterizing and Generalizing Shannon Entropy," NBER Working Papers 23652, National Bureau of Economic Research, Inc.
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    10. Sims, Christopher A., 2010. "Rational Inattention and Monetary Economics," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 4, pages 155-181 Elsevier.
    11. Ernst Fehr & Antonio Rangel, 2011. "Neuroeconomic Foundations of Economic Choice--Recent Advances," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 3-30, Fall.
    12. Stephen Morris & Ming Yang, 2016. "Coordination and the Relative Cost of Distinguishing Nearby States," Working Papers 079_2016, Princeton University, Department of Economics, Econometric Research Program..
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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

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