Behavioral Implications of Rational Inattention with Shannon Entropy

53 Pages Posted: 10 Aug 2013

See all articles by Andrew Caplin

Andrew Caplin

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Mark Dean

Brown University - Department of Economics; New York University (NYU) - Department of Economics

Date Written: August 2013

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.

Suggested Citation

Caplin, Andrew and Dean, Mark R. W., Behavioral Implications of Rational Inattention with Shannon Entropy (August 2013). NBER Working Paper No. w19318, Available at SSRN: https://ssrn.com/abstract=2308286

Andrew Caplin (Contact Author)

New York University (NYU) - Department of Economics ( email )

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Mark R. W. Dean

Brown University - Department of Economics ( email )

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HOME PAGE: http://www.econ.brown.edu/fac/Mark_Dean/

New York University (NYU) - Department of Economics ( email )

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