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Rational Inattention when Decisions Take Time

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  • Benjamin M. Hébert
  • Michael Woodford

Abstract

Decisions take time, and the time taken to reach a decision is likely to be informative about the cost of more precise judgments. We formalize this insight in the context of a dynamic rational inattention (RI) model. Under standard conditions on the flow cost of information in our discrete-time model, we obtain a tractable model in the continuous-time limit. We next provide conditions under which the resulting belief dynamics resemble either diffusion processes or processes with large jumps. We then demonstrate that the state-contingent choice probabilities predicted by our model are identical to those predicted by a static RI model, providing a micro-foundation for such models. In the diffusion case, our model provides a normative foundation for a variant of the DDM models studied in mathematical psychology.

Suggested Citation

  • Benjamin M. Hébert & Michael Woodford, 2019. "Rational Inattention when Decisions Take Time," NBER Working Papers 26415, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26415
    Note: ME
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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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