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Rational Inattention Dynamics: Inertia and Delay in Decision-Making

Listed author(s):
  • Jakub Steiner
  • Colin Stewart
  • Filip Matejka

We solve a general class of dynamic rational-inattention problems in which an agent repeatedly acquires costly information about an evolving state and selects actions. The solution resembles the choice rule in a dynamic logit model, but it is biased towards an optimal default rule that is independent of the realized state. The model provides the same fit to choice data as dynamic logit, but, because of the bias, yields different counterfactual predictions. We apply the general solution to the study of (i) the status quo bias; (ii) inertia in actions leading to lagged adjustments to shocks; and (iii) the tradeoff between accuracy and delay in decision-making.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-559.

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Length: Unknown pages
Date of creation: 04 May 2016
Handle: RePEc:tor:tecipa:tecipa-559
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  8. Yulei Luo, 2005. "Consumption Dynamics under Information Processing Constraints," Macroeconomics 0505011, EconWPA, revised 03 Jun 2005.
  9. Alisdair McKay & Filip Matejka, 2011. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," 2011 Meeting Papers 535, Society for Economic Dynamics.
  10. Antonella Tutino, 2012. "Online Appendix to "Rationally inattentive consumption choices"," Technical Appendices 11-143, Review of Economic Dynamics.
  11. Fudenberg, Drew & Strzalecki, Tomasz, 2015. "Dynamic Logit with Choice Aversion," Scholarly Articles 14397609, Harvard University Department of Economics.
  12. Bartosz Mackowiak & Mirko Wiederholt, 2004. "Optimal Sticky Prices under Rational Inattention," SFB 649 Discussion Papers SFB649DP2005-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Jul 2005.
  13. Matejka, Filip & Steiner, Jakub & Stewart, Colin, 2015. "Rational Inattention Dynamics: Inertia and Delay in Decision-Making," CEPR Discussion Papers 10720, C.E.P.R. Discussion Papers.
  14. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
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  19. Andrew Caplin & Mark Dean, 2013. "Behavioral Implications of Rational Inattention with Shannon Entropy," NBER Working Papers 19318, National Bureau of Economic Research, Inc.
  20. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
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  23. Ariel Rubinstein, 2007. "Instinctive and Cognitive Reasoning: Response Times Study," Levine's Bibliography 321307000000001011, UCLA Department of Economics.
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