Costly Consideration and Dynamic Choice Set Formation
43 Pages Posted: 24 Jul 2019 Last revised: 30 Aug 2020
Date Written: August 3, 2019
I consider a decision maker who faces a stochastic, inter-temporal choice problem and her attention to the choice variables is not fixed in time. She finds that choosing directly from the set of all alternatives is too costly as she has to consider too many options. To alleviate the costs, she implicitly frames the problem into two stages. In the first stage she constructs her choice set and in the second stage she chooses an option from this choice set. Within this framing design, I provide a theoretical basis of optimal consideration choices and endogenous choice set formation. I prove the existence of unique, continuous solutions for a class of recursive, dynamic, stochastic consumption choice problems in which decision makers have limited consideration capacities. The presence of attentional capacity constraints limits the optimal number of considered products and attributes inertial characteristic to the optimal consideration sets.
Keywords: bounded rationality, inattention, learning, attentional costs, consideration sets, choice sets
JEL Classification: C61, D11, D91, M31
Suggested Citation: Suggested Citation