Rational Inattention Via Ignorance Equivalence

53 Pages Posted: 10 Sep 2021

See all articles by Michele Muller-Itten

Michele Muller-Itten

University of Notre Dame

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Zachary Stangebye

University of Notre Dame

Multiple version iconThere are 2 versions of this paper

Date Written: September, 2021

Abstract

We introduce the concept of the ignorance equivalent to effectively summarize the payoff possibilities in a finite Rational Inattention problem. The ignorance equivalent is a unique fictitious action that is weakly preferable to all existing learning strategies and yet generates no new profitable learning opportunities when added to the menu of choices. We fully characterize the relationship between the ignorance equivalent and the optimal learning strategies. Agents with heterogeneous priors self-select their own ignorance equivalent, which gives rise to an expected-utility analogue of the Rational Inattention problem. The approach provides new insights for menu expansion, the formation of consideration sets, the value of information, and belief elicitation. In a strategic game of contract choice, the ignorance equivalent emerges naturally in equilibrium.

Keywords: Rational inattention, information acquisition, learning.

JEL Classification: D81, D83, C63

Suggested Citation

Muller-Itten, Michele and Armenter, Roc and Stangebye, Zachary, Rational Inattention Via Ignorance Equivalence (September, 2021). FRB of Philadelphia Working Paper No. 21-29, Available at SSRN: https://ssrn.com/abstract=3920783 or http://dx.doi.org/10.21799/frbp.wp.2021.29

Michele Muller-Itten (Contact Author)

University of Notre Dame ( email )

3060 Jenkins Nanovic Hall
Notre Dame, IN 46556
United States

HOME PAGE: http://https://sites.google.com/site/mmulleritten/

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Zachary Stangebye

University of Notre Dame ( email )

Notre Dame, IN 46556
United States
5746311054 (Phone)

HOME PAGE: http://www.zachstangebye.com

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