Rationally Inattentive Preferences

Abstract

This paper develops a decision-theoretic framework to study rational inattention (Sims [1998, 2003]). We provide an axiomatic characterization that relates rationally inattentive behavior to attitudes towards flexibility (Kreps [1979]) and temporal resolution of uncertainty (Kreps and Porteus [1978]), and describe a procedure to identify model parameters from observable choice data. Specifically, we show how attention costs – the key parameter in rational inattention models – can be measured using willingness-to-pay data, which can be collected in dynamic choice environments or generated in experimental settings.

Keywords: Blackwell order, flexibility, information acquisition, menu choice, rational inattention, temporal resolution of uncertainty

JEL Classification: D81, D83