Incentive-Driven Inattention

43 Pages Posted: 1 Apr 2019

See all articles by Wagner Piazza Gaglianone

Wagner Piazza Gaglianone

Central Bank of Brazil - Research Department

Raffaella Giacomini

University College London - Department of Economics; University of California, Los Angeles - Department of Economics

João Issler

Getulio Vargas Foundation (FGV)

Vasiliki Skreta

University of Texas at Austin - Department of Economics; University College London

Date Written: March 2019

Abstract

"Rational inattention" is becoming increasingly prominent in economic modelling, but there is little empirical evidence for its central premiseâ??that the choice of attention results from a cost-benefit optimization. Observational data typically do not allow researchers to infer attention choices from observables. We fill this gap in the literature by exploiting a unique dataset of professional forecasters who update their inflation forecasts at days of their choice. In the data we observe how many forecasters update (extensive margin of updating), the magnitude of the update (intensive margin), and the objective of optimiza- tion (forecast accuracy). There are also "shifters" in incentives: A contest that increases the benefit of accurate forecasting, and the release of official data that reduces the cost of information acquisition. These features allow us to link observables to attention and incentive parameters. We structurally estimate a model where the decision to update and the magnitude of the update are endogenous and the latter is the outcome of a rational inattention optimization. The model fits the data and gives realistic predictions. We find that shifts in incentives affect both extensive and intensive margins, but the shift in benefits from the contest has the largest aggregate effect. Counterfactuals reveal that accuracy is maximized if the contest coincides with the release of information, aligning higher benefits with lower costs of attention.

Keywords: Contest, incentives, rational inattention, structural estimation, Survey Design

JEL Classification: D80, D83, E27, E37

Suggested Citation

Gaglianone, Wagner Piazza and Giacomini, Raffaella and Issler, João and Skreta, Vasiliki, Incentive-Driven Inattention (March 2019). Available at SSRN: https://ssrn.com/abstract=3363532

Wagner Piazza Gaglianone (Contact Author)

Central Bank of Brazil - Research Department ( email )

SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70.000-000 DF 70074
Brazil

Raffaella Giacomini

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

University of California, Los Angeles - Department of Economics ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095-1361
United States

João Issler

Getulio Vargas Foundation (FGV)

R. Dr. Neto de Araujo 320 cj 1307
Rio de Janeiro, Rio de Janeiro 22250-900
Brazil

Vasiliki Skreta

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

HOME PAGE: http://vskreta.wixsite.com/vskreta

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

HOME PAGE: http://vskreta.wixsite.com/vskreta

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