Working Paper: NBER ID: w19318
Authors: Andrew Caplin; Mark Dean
Abstract: The model of rational inattention with Shannon mutual information costs is increasingly ubiquitous. We introduce a new solution method that lays bare the general behavioral properties of this model and liberates development of alternative models. We experimentally test a key behavioral property characterizing the elasticity of choice mistakes with respect to attentional incentives. We find that subjects are less responsive to such changes than the model implies. We introduce generalized entropy cost functions that better match this feature of the data and that retain key simplifying features of the Shannon model.
Keywords: Rational Inattention; Shannon Entropy; Behavioral Economics
JEL Codes: D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| attentional incentives (D91) | choice mistakes (D71) |
| elasticity of choice mistakes (D11) | attentional incentives (D91) |
| ILR property (K11) | choice behavior (D01) |
| difference in utilities across chosen acts (D11) | log difference in posterior beliefs (C11) |
| experimental findings (C90) | model predictions (C59) |
| generalized entropy cost functions (D81) | observed behaviors (C99) |